Raising the Minimum Wage by 38% to $10 per Hour Would Be “Economic Malpractice”
In a recent column about the minimum wage titled “Raising
the Minimum Wage is Cheap and Easy,” economist Dean Baker writes: “There are some policies that are pretty much
no-brainers. Most recent research finds
that [the minimum wage] has no impact on employment. Even the research that finds job loss
shows that the effect is small, suggesting that a 20 percent increase in the
minimum wage may reduce employment of young people by around 2 to 3 percent.”
Unlike Baker, and contrary to his assertion that the “minimum wage is
non-controversial,” most economists believe in the Law of Demand, which means
that there is a non-controversial inverse relationship between wages and the
number of workers hired.
Artificially raise
the required minimum wage for unskilled workers and the employment of unskilled
workers will fall according to the non-controversial laws of economics, just as
surely as water will run downhill according to the non-controversial laws of
physics.
Baker claims that the “only real issue regarding the minimum wage is how
high it should be,” and he then goes on to propose a 38 percent increase in the
minimum wage from $7.25 to $10 an hour. One might wonder why Baker is being so stingy,
and ask if it wouldn’t be better to artificially mandate a minimum wage of $20
or $30 per hour, but let’s put that issue aside and consider only the most
important issue: how much of an adverse effect on employment and unemployment will
result from a 38 percent increase in the minimum wage for young Americans aged
16-19 years old (the group most affected by the minimum wage)?
Let’s use the research cited by Baker that finds only “small” effects of a
2-3 percent reduction in employment from a 20 percent increase in the minimum
wage. Accordingly, a 38 percent increase
in the minimum wage to $10 per hour would reduce teenage employment by between 3.8
and 5.7 percent. And what would that
mean for the number of jobs eliminated and the increase in the jobless rate?
The Department of Labor estimates that there are currently just under six
million teenagers currently in the labor market. About 4.5 million of them are employed, and
1.4 million are unemployed, resulting in a 23.7 percent June jobless rate for
that group.
If the 38 percent increase in the minimum wage to $10 per hour had the
minimum effect of reducing teenage employment by “only” 3.8 percent, that would
put 171,000 currently-employed teenagers out of work and increase the teen
jobless rate almost three full percentage points to 26.6 percent. At the high end, a 5.7 percent reduction in
teen employment would put almost one-quarter million teenagers out of work and
drive the teenage jobless rate up to 28.1 percent, the highest rate in
history.
Actually those estimates of the new, higher unemployment rates are
conservative because raising the minimum wage by almost $3 per hour would certainly
attract new unskilled workers into the labor market. With thousands of additional job seekers, the
jobless rates would be even higher than the static estimates above.
Bottom Line: Raising the minimum
wage is always a bad idea, because it harms the very workers whom we want to help
-- unskilled, inexperienced teenage workers who desperately need jobs to get
the experience, training and work habits that will eventually make their market
value much higher than the minimum wage.
But to raise the minimum wage by 38 percent as Baker proposes, during
the worst jobless recovery in modern history when the unemployment rate for
16-19 year olds is already 23.7 percent, would be a serious case of “economic
malpractice.” For the hundreds of
thousands of teenagers who would lose their jobs, or not find them in the first
place, a 38 percent increase in the minimum wage at this time wouldn’t be “cheap
and easy,” but would be more accurately described as “expensive and
devastating" for America's unskilled workers.
156 Comments:
"Raising the minimum wage is always a bad idea."
That's a false assumption based on oversimplified economics.
I stated before:
A rise in the minimum wage can increase real economic growth.
The higher wage attracts better workers, with higher reservation wages, to increase productivity.
Minimum wage workers have high marginal propensities to consume. So, a higher minimum wage increases consumption.
Only a portion of the higher minimum wage may be passed along in higher prices, because portions will be absorbed by "excess" wages of other workers and "excess" profits.
Weak or poorly managed firms will lose business or fail. However, stronger or better managed firms will gain their business, and also gain from the increased demand.
It's possible, a 10% rise in the minimum wage (e.g. $10 to $11) may increase real economic growth 5% (e.g. 2% to 2.1%).
However, a 50% rise in the minimum wage may decrease real economic growth 20%, etc.
Quote from Peaktrader: "That's a false assumption based on oversimplified economics."
Supply and demand is oversimplified? I can't wait for you opinion on marginal utility.
Geoih, there are more economic forces than supply and demand.
Economists find the net effects of relevant forces.
Diminishing marginal utility was a powerful force that led to the recent recession (a few years ago).
A 38% increase in the minimum wage would probably result in a 38% increase in the unemployment rate.
It will push everyone into higher tax brackets.
Let me re-phrase:
Passing legislation that attempts to violate, ignore, or circumvent basic incontrovertible laws of supply and demand will ALWAYS result in economic outcomes that make the overall economy worse off, not better off.
Just like passing laws to pretend that water runs uphill, ignoring the laws of physics, will ALWAYS create mischief. Or just like passing minimum temperature or maximum temperature laws for thermostats would be disastrous!
As the NY Times said in the 1980s, the right minimum wage is $0.00 per hour.
If the minimum wage is not $0.00, how do you or politicians pretend to know what the "correct" wage for unskilled labor is? It's total hubris and a real fatal conceit for somebody to pretend they know what the correct minimum wage should be. And if we allow you or politicians to set an artifically high wage, why don't you set it to $100 per hour, or some other really high wage to make unskilled workers really, really rich?
Rand said...
It will push everyone into higher tax brackets.
so it obviously means more taxes will be collected, which helps to close the deficit...
similarly, raising the minimum wage will increase revenues for social security & medicare, helping to keep those programs solvent long term...
it would also likely increase half as many working just above the new minimum whose pay will increase as employers adjust their overall pay scales...& once everyone is working at a decent wage, young people will be able to move out of their parent's basements, and those who've doubled up will again be in the market for housing, which will ultimately put a floor under falling real estate prices, and may even save the banks from having to mark those depressed loan assets to market...
There's too much talk here about what might happen if such and such policy were enacted, and then justification of one's position based on that assumption.
I prefer to stick to the argument that the minimum wage is immoral because it is the threat of State violence and coercion used to prevent freely acting individuals to engage in contracts of their choosing.
And I might add that even IF minimum wage increased economic growth (I do not find that convincing at all), that does not mean that a minimum wage should be implemented. The ends do not justify the means.
@rjs
You claim that minimum wage will increase govt revenue.
On what basis do you make this claim? How does increasing wages for some people (and of course causing massive unemployment for others) result in higher revenues?
This is a ridiculous argument. You will create more unemployment and fail to create more wealth in society. Wages are tied to productivity. You cannot increase wealth/wages without increasing productivity.
The reason young ppl dont earn a lot of money is because they are not productive enough to demand a high wage. They need to learn basic skills (these jobs pay lower entry level wages) and can eventually progress to higher paying tasks.
Tax Incidence
=== ===
[edited] In economics, "tax incidence" is the analysis of the effect of a particular tax on the distribution of costs and benefits. A tax is said to "fall" upon the groups that, at the end of the day, suffer a loss of income because of the tax. The key concept is that the tax burden does not depend on who pays the tax dollars (say an employer), but on the willingness of customers to pay more (the elasticity of demand) compared to the willingness of employees and investors to receive less (the elasticity of supply).
=== ===
What about taxes paid by employers when they employ people?
From Wikipedia above:
=== ===
[edited] Businesses are more sensitive to wages than employees. So, payroll taxes, employer mandates, and other taxes collected from the employer end up falling on the employee. The tax is passed onto the employee in the form of lower wages.
=== ===
An increase in the minimum wage is a sort of tax which an employer pays directly to the employee. Still, the employee does not benefit, because the employee pays that tax in various ways.
=== ===
[edited] The most likely outcome of a minimum wage increase is confirmed by Neumark and Wascher and is consistent with the Law of Demand. Everything beneficial for unskilled workers decreases, such as employment levels, hours worked, fringe benefits, subsidized uniforms and food, and training. The demand curve for labor slopes downward. That is, businesses hire fewer workers and give fewer non-wage benefits when minimum-wage laws force them to pay a higher wage.
=== ===
At the extreme, if neither the employer nor the employee can pay the tax (the economics are "inelastic"), then the employee is not hired or the business fires the employee.
Tax Incidence, Tax Burden, and Tax Shifting: Who Really Pays the Tax?
A long, clear academic paper.
EasyOpinions.blogspot.com
No one will be paid more than the output that they generate (unless the job is mandated by govt, in which case the costs are borne by the employer).
Unwillingness to admit that productivity has to govern wages are behind the two most ignorant myths :
1) Raising the minimum wage raises living stadards of those workers.
2) Women earn 77% of what men earn for the same job.
These two huge litmus tests of economic illiteracy are rampant for that reason.
PeakTrader
"The higher wage attracts better workers.."
_______________
A higher wage does tend to attract better workers. But that decision is best left up to the employer.
Cost versus benefit.
kmg said...
"No one will be paid more than the output that they generate unless the job is mandated by govt, in which case the costs are borne by the employer"
_____________
Born by the employer.... or the consumer?
The higher wage attracts better workers, with higher reservation wages, to increase productivity.
But companies don't need to wait for the government to mandate an artificially high wage for unskilled workers to attract better workers and increase productivity. They can offer higher wages any time they want, they don't need to wait for a minimum wage law to achieve that outcome.
Raising the minimum wage will bring on the next recession even faster, go for it! /sarc
Recessions and higher minimum wages arem't related at all *sarc*
Minimum wages since 1938, nominal and CPI & CPPI corrected
Even with just a CPI correction, he minimum wage is lower now than in the 70s.
Curious, what is the lag time between higher minimum wage and the resulting inflation?
It's a quite variable time period between the raising of minimum wage and the onset (or lengthening) of a recession, and it also isn't a guarantee as the chart shows. It happens about 70% of the time.
But considering the tender condition of the US economy, all raising it will do now is hasten its virtually guaranteed onset.
addendum:
There's little correlation between raising the minimum wage and inflation, mostly since inflation requires money printing.
most economists believe in the Law of Demand, which means that there is a non-controversial inverse relationship between wages and the number of workers hired.
=================================
It is not about beliefs: it is about what the facts are.
Undoubtedly the economists are PARTLY correct, but nothing sys the relationship is linear.
If an employer is allowed to pay a wage people cannot live on, and they resort to food stamps, then the public is effectively subsidizing that employer.
From the public perspective the question is a matter of Total Cost: it might be cheaper to not have to pay some people who earna living wage (and pay taxes) and pay others a full ride at the lowest possible level.
The economists can have their "beliefs" but the objective truth might be a little more complex.
This is another example of Total Cost = Production Cost + External Cost + Government Cost.
There are costs and benefits associated with each job produced. There are costs associated with each job produced that is insufficient to live on, and there are costs associated with government monitoring (or failing to monitor) the situation.
Plus what peak Trader said/
Supply and demand is oversimplified? I can't wait for you opinion on marginal utility.
==========================
Yes, it is oversimplified. Marginal utility is highly elastic.
A 38% increase in the minimum wage would probably result in a 38% increase in the unemployment rate.
=================================
There is no data that supports a linear assumption, and it is highly improbable.
There's little correlation between raising the minimum wage and inflation, mostly since inflation requires money printing.
==================================
If the economic pie is growing and the population is growing, would not that ALSO require printing more money?
Then there is the WALMART problem. How do you distinguish between the velocity of money and inflation? If Walmart maximizes its profits by moving massive amounts of money at ever smaller profit margins, then how can you tell how much of the profit is due to the increased velocity of money and how much is due to inflation?
Note: The significant, adverse effect of artificially increasing the minimum wage on employment and unemployment for unskilled workers only captures part of the negative effect of the government price control.
For example, if the jobless rate for unskilled workers increases to 28% following an increase in the minimum wage to $10 per hour, even those workers fortunate enough to find or keep a job at $10 per hour could still be made much worse off in the following ways:
1. They might still be employed, but their hours might be reduced following the increase in the minimum wage. Overtime hours might be eliminated or reduced.
2. They might still be employed, but their benefits might be reduced following the increase in the minimum wage: uniforms are no longer provided, free or discounted meals or other employee discounts are eliminated or reduced, company parties or picnics are eliminated or reduced, any health care-related benefits or tuition benefits are eliminated or reduced, bonuses or profit-sharing are reduced or eliminated, etc.
In other words, there are many non-monetary factors related to unskilled work that would be elminated or reduced following government-mandated increases in the minimum wage, which would make employed, unskilled workers worse off, even if they are so fortunate to keep, or find a job after thousands of their counterparts have been fired, or not hired in the first place.
The significant, adverse effect of artificially increasing the minimum wage on employment and unemployment for unskilled workers only captures part of the negative effect of the government price control.
==============================
So the law of demand is incomplete.
They might still be employed, but their hours might be reduced following the increase in the minimum wage.
===============================
They are still better off then: same wages and more free time to look for other work or work for themselves: plant some tomataos.
The employers are no worse off,since they still pay the same amount out. Unless you think peopel won't work harder to keep a job that earns them more money.
Gerorge Washington used to complain about how hard it was to get any work out of his slaves, and little wonder.
They might still be employed, but their benefits might be reduced following the increase in the minimum wage: uniforms are no longer provided, free or discounted meals or other employee discounts are eliminated or reduced,....
===========================
The employee is still better off: they get cash and they can decide what to do with it that meets their personal best interests.
When they show up to work looking shabby, the uniforms will come back: they are not a benefit to the employee as much as they are to the employer.
In other words, there are many non-monetary factors related to unskilled work that would be elminated or reduced following government-mandated increases in the minimum wage......
===============================
Not only is the law of demand incomplete, but the poor low wage suckers are doomed in any case.
So much for capitalism making everyone better off.
I've just lost total respect for so many individuals and publications over nonsense like this. The fact that someone can't print on a major weblog that raising the minimum wage isn't controversial just shows how bad things are in the economic, intellectual, and journalistic worlds.
The fact that someone can't print on a major weblog that raising the minimum wage isn't controversial just shows how bad things are in the economic, intellectual, and journalistic worlds.
=============================
Are you referring to MJP or Dean Baker?
just shows how bad things are in the economic, intellectual, and journalistic worlds.
===============================
That must leave our salvation to things like art and philosophy.
Unemployed teens is a middle class problem.
Lots of people are scraping by on 8 or 9 dollars an hour.
Millions I suppose.
Kids don't see the parents as they need two or three jobs just to pay the basics.
No dental, no medical, no sick days.
The bottom of the barrel means kids growing up on the street and rotten teeth.
And this contributes how?
"That's a false assumption based on oversimplified economics"...
Wrong again pt (are you wanting to cover the costs for the mom & pop shops that can't afford it?) and its proven everyday in the unemployment firgures for young people...
"It's possible, a 10% rise in the minimum wage (e.g. $10 to $11) may increase real economic growth 5% (e.g. 2% to 2.1%)"...
Its also possible that a rise of 10% in the BS quotient will cause a western sunrise also sethstorm...
Oops! My bad! I meant pt...
Sorry dude, you can't spin the reality with some cutesy numbers tricks...
"Unemployed teens is a middle class problem"...
Wrong bryan, ever so WRONG!...
"Kids don't see the parents as they need two or three jobs just to pay the basics.
No dental, no medical, no sick days.
The bottom of the barrel means kids growing up on the street and rotten teeth"...
Oh yeah! The march of the strawmen guaranteed to make liberals fall down bawling their eyes out...
How ever so touching bryan...
Well bryan od son, here's your chance to stand tall and whip out YOUR wallet so that the spawn of fools and bottom feeders who made bad life choice won't have rotting teeth...
You can do it lad!
Given a $5 market wage and abundant unskilled labor, many will refuse to work for less than $8, e.g. above average workers, even if they're offered $6 or $7.
the High Priest:
"I prefer to stick to the argument that the minimum wage is immoral because it is the threat of State violence and coercion used to prevent freely acting individuals to engage in contracts of their choosing."
It's hard to find any fault with that.
rjs
"so it obviously means more taxes will be collected, which helps to close the deficit...
similarly, raising the minimum wage will increase revenues for social security & medicare, helping to keep those programs solvent long term...
it would also likely increase half as many working just above the new minimum whose pay will increase as employers adjust their overall pay scales...& once everyone is working at a decent wage, young people will be able to move out of their parent's basements, and those who've doubled up will again be in the market for housing, which will ultimately put a floor under falling real estate prices, and may even save the banks from having to mark those depressed loan assets to market..."
Wow. A complete win-win-win. The higher the minimum wage, the more the deficit can be reduced, the more government can spend, and the richer we will all be.
I wonder why no one has noticed this beneficial correlation before now?
What do you suppose the min wage would have to be to eliminate the annual deficit entirely?
"If an employer is allowed to pay a wage people cannot live on, and they resort to food stamps, then the public is effectively subsidizing that employer."
Most entry level jobs pay less than enough to live on, and there should be no expectation that it be otherwise. Young people with no skills and no work experience don't expect to be self supporting. Their value to an employer is low, so their pay will be low.
If a person reaches adulthood with no skills or work experience it is most likely because they have been forbidden by law to work for less than some arbitrary amount that has prevents them from gaining skills.
"From the public perspective the question is a matter of Total Cost: it might be cheaper to not have to pay some people who earna living wage (and pay taxes) and pay others a full ride at the lowest possible level."
Nonsense.
"The economists can have their "beliefs" but the objective truth might be a little more complex."
LOL
As if you had any idea what that objective truth might be.
"This is another example of Total Cost = Production Cost + External Cost + Government Cost."
That nonsense again?
"There are costs and benefits associated with each job produced. There are costs associated with each job produced that is insufficient to live on, and there are costs associated with government monitoring (or failing to monitor) the situation."
Why do you have a problem with people negotiating their own terms of employment without government interference?
"If the economic pie is growing and the population is growing, would not that ALSO require printing more money?"
Only if you think there's some benefit to prices remaining unchanged.
"Then there is the WALMART problem. How do you distinguish between the velocity of money and inflation? If Walmart maximizes its profits by moving massive amounts of money at ever smaller profit margins, then how can you tell how much of the profit is due to the increased velocity of money and how much is due to inflation?"
Velocity of money = velocity of goods and services. It has no independent meaning. Every exchange involves a transfer of ownership of money and a transfer of ownership of goods and services.
In other words, the more transactions that take place, the more transactions that take place.
"They are still better off then: same wages and more free time to look for other work or work for themselves: plant some tomataos."
LOL
It's marvelous that you can decide for other people what makes them better off.
"If an employer is allowed to pay a wage people cannot live on, and they resort to food stamps, then the public is effectively subsidizing that employer."
Why should a teenager who works for minimum wage while living with their parents be eligible for food stamps, and why do you believe they should be able to live on their earnings?
"Gerorge Washington used to complain about how hard it was to get any work out of his slaves, and little wonder"
Incentives matter. People with no expectations of a better future are unlikely to work harder than absolutely necessary.
You should be aware that some slaves with skills WERE paid for their valuable services.
Employers can pay higher wages any time they want ad make their own productivity decisions...
+++++++++?+++++++++++
Another example of why the e inimical theory is imperfect: employers do not have the correct incentive. They can have their workers wages assisted with food stamps.
Total Cost = Production Cost + External Cost + Government Cost but the employers are concerned only with production cost.
"Some slaves were paid"
Hardly a free trade transaction is it? Owners used various means to maintain their property, which was also rented out to others for profit.
You could hardly say the slaves were much incentivesed to better their life, since at the end of the month, year or decade they were still slaves. This is another example of nonlinear cost vs incentive. Another example of failure in the law of demand not to mention the amorality of capitalism.
A teenager who works part time for minimum age is not eligible for food stamps. I never said anything about what I think about food stamps so don't put words in my mouth the change the arehument.
Clearly a part time job can only be expected to pay a proportionate amount of enough to live on. ( whatever we can agree that is) . Even slave owners had different standards as to how well to keep their slaves. But even a slave owner had to pay enough to keep them alive at least long enough to recover his cost.
Your argument says nothing about employers being subsidized through externalities, whether by parents or food stamps.
Great post, although I fear unlikely to convert minimum wage supporters who are apparently comfortable with suspending most laws of nature, physics and economics to support their view
Don Boudreaux wrote an excellent letter to the NY Times on this subject:
http://bluecravat.blogspot.com/2012/05/feel-good-leglistaion-repost.html
unlikely to convert minimum wage supporters who are apparently comfortable with suspending most laws of nature, physics and economics
=================================
One can hardly compare the laws of nature and physics withthe "laws" of economics. Especially when the practitioners erroneously focus on one transaction, instead of backing out and establishing a reasonable system boundary for the analysis.
For myself, I ave not said anything one way or another about minimum wage except to point out that the analysis presented appears to be weak and one-sided.
It's marvelous that you can decide for other people what makes them better off.
================================
I did not make any such "decision", any more than MJP did in his statement about what might make people better or worse off.
Is it your contention that an employee that makes the same money for less hours is somehow worse off?
Is it your contention that he is worse off if he gets money that he can decide to spend in his best interest than if he gets a lower wage plus uniforms, as in MJPs example?
velocity of goods and services. It has no independent meaning.
===============================
You do not disagree that I can try to maximize my profits by moving more goods quicker and at a lower margin in order to compete.
My only observation was that there are other reasons to print money than just to create an artificial flow of money and create inflation to make the economy look better.
"This is another example of Total Cost = Production Cost + External Cost + Government Cost."
That nonsense again?
===================================
That nonsens came right out of my graduate economics classes.
Why do you have a problem with people negotiating their own terms of employment without government interference?
================================
Nice try. Are you seriously arguing that the government is interfering with the employees ability to negotiate by limiting the ability to negotiate DOWN?
If there is interference, isn't it mostly interference with the EMPLOYER?
I don't have a problem with people negotiating their own employment conditions, not even if they hire a union to help them do so. Do not put words in my mouth.
The problem I have is that analysis of JUST the employment part ignores the rest of the Total Cost equation, without which one cannot make any statement about what is best for "people" or the economy in general.
At a minimum, one would have to consider the employment transaction and all the other related transactions those to parties conduct. Better still, one would consider the thrid degree of freedom: the trickle down to a third level of transactions. Economists do this sort of thing all the time, when they consider the multiplier effect of new jobs or projects.
For what it is worth, remember that the right hand terms in that equation include both positive and negative costs: production cost is net of direct costs and benefits of the producton.
"This is another example of Total Cost = Production Cost + External Cost + Government Cost."
That nonsense again?
===================================
That nonsens came right out of my graduate economics classes.
Ah, the certainty and confidence in economic models of the whipper snapper brigade...
As if you had any idea what that objective truth might be.
===============================
I never claimed to know what it is, only that it is out there. If the laws of economics are in fact as immutable as the laws of science and physics, then the truth will (eventually) become apparent and accepted.
I merely contend that arguing narrowly (and often deliberately falsely) in favor of a dogmatic position is not the best way to discover that objective truth.
I make the same argument to my liberal and my conservative friends.
Look, the argument that the best thing is for every individual to look after their own welfare supposes that the general welfare is no more than the sum of all the individual welfares, and no one can do that better than the individuals. As such this is an argument that society as a whole is better off using this strategy than any other: it is a socialistic argument at its core.
In order to resolve that argument one would have to agree on how best to measure and evaluate the wealth of society and the velocity at which it increases. Some would argue that you also need to consider sustainability: a process that creates unlimited growth right now might turn out to be explosive and damage future welfare to such an extent that net present value is reduced.
I do not claim any knowledge about that, either, other than to point out that it is a consideration. Any business has to balance how much growth it can handle with how much debt it can take on to finance it.
If you are going to argue that unlimited personal freedom makes "everyone better off" then you need to be able to agree to some measure of what that amounts to, otherwise your position is indefensible.
Ah, the certainty and confidence in economic models of the whipper snapper brigade...
=================================
Hey, I am not the one arging the immutable "laws of economics".
If you have a construct or a proof that shows that equation is wrong, I am willing to listen.
Simply dismissing it out of hand as "nonense" does not constitute an argument.
Raising the minimum wage is always a bad idea, because it harms the very workers whom we want to help -- unskilled, inexperienced teenage workers who desperately need jobs to get the experience, training and work habits that will eventually make their market value much higher than the minimum wage
Really. Of minimum wage workers only 12.5% are teenagers; and 10.4% of them are employed by exempt establishments and paid less than the minimum wage.
Characteristics of Minimum Wage Workers: 2011.
“The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”
John Kenneth Galbraith
http://jessescrossroadscafe.blogspot.com/2012/07/chris-hedges-careerists-and-banality-of.html
If minimum wage is raised to $10, wouldn't the increase to the employer be greater than 38% when FICA and various state worker's comp cost are considered?
"“The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”"
Jesse, I like it. But wouldn't it be even more true if you subbed out conservative for liberal and inserted stealing for selfishness?
Raising the minimum wage is always a bad idea, because it harms the very workers whom we want to help -- unskilled, inexperienced teenage workers who desperately need jobs to get the experience, training and work habits that will eventually make their market value much higher than the minimum wage.
================================
By that logic all entry level workers should be paid zero.
Minimum wage is a price control. It sets an arbritary minimum price for employers to hire 1 hour of labour.
It distorts the labour market as total demand for hours of labour will decrease based on Supply/Demand. The unintended consequences are not positive.
If you believe they are positive then you believe that price controls work and the history of price controls is that clearly they do not work.
If you want wages for the people at the lower end of the wage scale to increase then let them gain experience and increase the value of their labour so that employers will pay them more. Or even better, create conditions where there are more employers bidding for their labour so that competition causes the price paid for their labour to increase. Minimum wage does the opposite of this.
"Another example of why the e inimical theory is imperfect: employers do not have the correct incentive. They can have their workers wages assisted with food stamps"...
Yet another reason to get rid of these 'pander to parasites' programs politicos are so fond of hydra...
From the Politico an editorial on the farm bill: New farm bill: Welfare in disguise
What’s worse, the “farm bill” label allows ever-larger spending on welfare programs to bloat the entire package.
Looking at the amendment votes, it’s clear that senators from both parties blocked a number of sensible reforms...
"John Kenneth Galbraith"...
LMAO!
Good one jesse!
Funny thing is, that leech Galbraith never bothered to seriously address who was suppose to pay for his wet dreams...
Peak,
Given a $5 market wage and abundant unskilled labor, many will refuse to work for less than $8, e.g. above average workers, even if they're offered $6 or $7.
So? If people are offered $6 and $7 per hour to work, but not $8 per hour, what makes you think these people would all the sudden have jobs if the minimum wage was increased to $8?
People are paid what they are worth. If they don't like that they are so unproductive, they can learn a skill or get better at basic job skills, like showing up to work on time and staying for 8 hours.
Hey, I am not the one arging the immutable "laws of economics".
If you have a construct or a proof that shows that equation is wrong, I am willing to listen.
Simply dismissing it out of hand as "nonense" does not constitute an argument.
It was a virtual certainty that you wouldn't get it.
By that logic all entry level workers should be paid zero.
Reductio ad absurdum.
"By that logic all entry level workers should be paid zero."
Hydra, there is absolutely no connection between letting the market decide what wages people should get and your statement above.
Entry level workers would be getting paid what they are worth to employers. To state that they would be getting paid zero is nonsensical.
Ken says: "People are paid what they are worth."
I wonder if you or anyone you know had a job?
And I answered your question above.
Hydra,
Hey, I am not the one arging the immutable "laws of economics".
Supply and demand is an immutable law of economics. Proving this through experimental economics is why Vernon Smith got the Nobel Prize in Economics. I have told you this repeatedly in the past, yet you refuse to acknowledge even the existence of Vernon Smith, much less the fact that his research lays the smack down on your beliefs of supply and demand.
Peak,
I wonder if you or anyone you know had a job?
I've been working since I was 13.
And I answered your question above.
No, you didn't. You merely asserted that people who don't get paid more than minimum wage would magically get paid more if the minimum wage just increased.
If, as an employer, I don't have the incentive to hire you at $8/hour, when the minimum wage is $5/hour, what is my incentive to hire you at $8/hour, when the minimum wage is $8/hour.
If, when the minimum wage is $5/hour, and I offer you $7/hour, but you reject my offer and hold out for $8/hour, but I never offer it, why would I all the sudden offer you $8/hour if the minimum wage is increased to $8/hour?
The people you claim will enter the work force because of an increased minimum wage don't exist. If I can pull down $8/hour, I can do that if the minimum wage is $5/hour as well as if the minimum wage is $8/hour. Stronger workers don't just magically join the work force due to minimum wage increased. Stronger workers can all ready command wages well above minimum wage, so will be engaged in the work force, if they want to, regardless of what the minimum wage is.
What the minimum wage does do is keep those who cannot produce at levels at or above the minimum wage from getting a job. For example, if all I can pull down with no minimum wage is $4/hour, then, if the minimum wage is $5/hour, I will simply remain unemployed, since I cannot produce enough to incentivize an employer to hire me. Why would they? Hiring me means operating at a loss with respect to my employment.
Ken, obviously, economics is "magic" to you.
Also, I guess, all workers willing to work for the minimum wage are equal to you.
"Ken, obviously, economics is "magic" to you.
Also, I guess, all workers willing to work for the minimum wage are equal to you."
More statements that have no connection to what was stated in the previous post. Ken explained to you how the real world worked and you called it "Magic"??
He made absolutely no reference to the equality or inequality of workers willing to work at the minimum wage.
In the real world, a co-worker may be much more productive than you and yet underpaid compared to you.
In the real world, that underpaid worker should get another job that pays him what he is worth.
In the real world, if a company pays more productive workers less other workers that are less productive, that company will lose the more productive workers to their competitors and will be left with the less productive workers. Eventually that company will go bankrupt as their competitors eat their lunch.
Do you believe that's true for most workers in the real world?
I beleive it is true in non unionized companies that operate in a free market without barriers to entry. The efficient companies survive, the inefficient go bankrupt.
To pay more productive workers less than less productive workers is very inefficient. The companies that pay their employees equal to their productivity will get the most productive works and will drive the companies that don't out of business. That is how the real world works.
Peak,
Ken, obviously, economics is "magic" to you.
The laws of supply and demand are in no way magical. I understand them. You don't. It's that simple.
Also, I guess, all workers willing to work for the minimum wage are equal to you.
All people who get paid the same, regardless of their work are equally as valuable. This is in fact what price means.
In the real world, a co-worker may be much more productive than you and yet underpaid compared to you.
Probably not. If this situation is occuring it will be temporary at best. Supervisers are very aware of their workers' pay and productivity. If people who are more productive than me are willing to work for less than me, I will soon be out of a job. On the other hand, employers are willing to pay for productivity. If my employer refuses to pay my more productive co-worker more than me, he will go to a company that will.
Ken, just because anyone can understand a simple and standard partial equilibrium model, e.g. supply and demand, doesn't prove I don't understand it.
Even in the real non-union world, some workers are underpaid and some are overpaid.
Yeah some workers are underpaid. There's no one holding them back from going anywhere else. This is not freaking commie china paying slave labor. I'm underpaid right now, and I have interviews scheduled. STOP WHINING and go get your hands dirty. There is no excuse.
this minimum wage is BS. A raise just because???? that going to screw a lot of people over. A LOT of people.
At one of my first jobs I asked for a raise after 6 months. The immediate response was WHY? He was not a jerk about it. He asked how I was going to make him money to pay for my raise. I had not thought about this and was speechless.
The light bulb "illuminated"
No one has brought up the fact that the true minimum wage is the unemployment benefit in a given locality, which can vary considerably. Unemployment benefits in Arizona, for instance, are far less than in Washington or Massachusetts. Unemployeds eligible for UI benefits in Washington, which max out at $604, would have to take a job that pays more than $15.10/hr to increase their income. They won't work for less until their UI benefits run out. Arizona, on the other hand, has a maximum benefit of $240 a week, equivalent to $6/hr. It doesn't pay to sit on the couch and watch Seinfeld re-runs in the Copper State.
pt says: "Also, I guess, all workers willing to work for the minimum wage are equal to you"...
Oh dear! It seems that 'Obama class warfare card' has hit the table now...
"Hardly a free trade transaction is it?"
Yes, in that context only it was a free trade transaction. Unusual skills were rewarded with pay or they wouldn't be available.
"You do not disagree that I can try to maximize my profits by moving more goods quicker and at a lower margin in order to compete."
No I don't disagree with that at all. I disagree with the concept of "velocity of money". It has no useful meaning, and the equation MV=PT is equally useless, as it merely tells you that what was paid for is what was received.
"A teenager who works part time for minimum age is not eligible for food stamps. I never said anything about what I think about food stamps so don't put words in my mouth the change the arehument."
When I figure out what the 'arehument' is I'll try not to change it.
You may want to reread your original comment about "liveable wage" and food stamps. How many independent adults do you suppose there are attempting to live on min wage, and who are eligible for food stamps? As I pointed out, most entry level workers are teens who will acquire skills and move on to better things. Do you really believe that taxpayer subsidy of some few skill-less adults is a serious problem? And it IS the worker who is being subsidized, not the employer.
Ron H. said...
I disagree with the concept of "velocity of money".
Disagree all you like, but disagreeing with reality is unwise at best.
Money changes in velocity, or perhaps I should link some pictures of the Weimar Germany hyperinflation in 1923 where they were getting rid of marks as fast as they got them, or how folk 'hoarded' dollars (as in didn't spend as fast as before 1930) in the Great Depression?
"That nonsens came right out of my graduate economics classes."
I suppose it's too late to ask for your money back.
"Nice try. Are you seriously arguing that the government is interfering with the employees ability to negotiate by limiting the ability to negotiate DOWN?"
Of course I am. Why should government tell anyone how much they can work for, or how much they can pay someone. It's absurd.
If a worker isn't able to produce a value higher than the minimum wage they won't be employed. They should be free to negotiate whatever wage they are willing to accept. Work experience and the acquisition of skills will increase their value to employers, allowing them to demand higher wages.
"If there is interference, isn't it mostly interference with the EMPLOYER?"
It is interference with the right of competent individuals to freely enter into agreements with one another.
The employee is prohibited from acquiring skills by working for a lower wage, and the employer is prohibited from providing those skills to someone who can't produce at a level equal to or higher than the min wage.
"The problem I have is that analysis of JUST the employment part ignores the rest of the Total Cost equation, without which one cannot make any statement about what is best for "people" or the economy in general."
As it should be. Only the individuals directly involved can determine what is best for them, and what is best for the economy in general is almost certainly individuals pursuing their own ends and making their own choices without interference from busy-bodies who think they know what's best for other people.
You will have a tough time convincing an unemployed worker that it's best for the economy in general that they remain unemployed because they can't produce at a level high enough to justify minimum wage based on the total cost equation.
"Not only is the law of demand incomplete, but the poor low wage suckers are doomed in any case.
So much for capitalism making everyone better off."
You really should ask for your money back. You have been cheated.
Learn some economics.
"Is it your contention that an employee that makes the same money for less hours is somehow worse off?
Is it your contention that he is worse off if he gets money that he can decide to spend in his best interest than if he gets a lower wage plus uniforms, as in MJPs example?"
It is my contention that I can't determine whether an employee is better off in any given situation and neither can you, as all value is subjective.
"I don't have a problem with people negotiating their own employment conditions, not even if they hire a union to help them do so. Do not put words in my mouth."
You can't favor both minimum wage and people negotiating their own employment conditions. Your apparent support of minimum wage precludes your support of self determination.
"Look, the argument that the best thing is for every individual to look after their own welfare supposes that the general welfare is no more than the sum of all the individual welfares..."
And how else could it be? There is no entity called "society as a whole", with consciousness and viewpoints and benefits and losses. There are only individual people.
Society is a term describing the interactions of individuals.
"...and no one can do that better than the individuals. As such this is an argument that society as a whole is better off using this strategy than any other: it is a socialistic argument at its core."
Nonsense. There's nothing socialist or collectivist about it. There is no "society as a whole".
"If you are going to argue that unlimited personal freedom makes "everyone better off" then you need to be able to agree to some measure of what that amounts to, otherwise your position is indefensible."
There is no argument that everyone is better off, only that maximum personal liberty appears to provide more individuals with more opportunities and better living standards, by whatever measure you wish to chose, than any other known arrangement - better especially than those with top down control and central planning.
The trouble with your silly total cost equation is that it requires a composite entity that you call "society as a whole", with viewpoints and likes and dislikes, benefits and costs outside those of each individual member of that society.
Then there's the problem of assuming that the will of a majority of individuals should represent the will of all individuals.
"If the laws of economics are in fact as immutable as the laws of science and physics, then the truth will (eventually) become apparent and accepted."
As I'm sure you know, any "law" is only immutable until it is falsified. Many physical laws are considered immutable, and the laws of supply and demand appear to be immutable also. While there are many ways to interfere with supply, demand, and price, the results are completely predictable.
A great example of this is minimum wage. If you raise the price of labor, demand for it will decrease. That lower demand will, of course, affect mostly those at the very bottom - the very ones supposedly helped by the increase.
"By that logic all entry level workers should be paid zero."
F. W. Woolworth would agree with you. He worked his first job as a clerk in a dry goods store for the experience and no wages for two years.
Bart:
"Disagree all you like, but disagreeing with reality is unwise at best.
Money changes in velocity, or perhaps I should link some pictures of the Weimar Germany hyperinflation in 1923 where they were getting rid of marks as fast as they got them, or how folk 'hoarded' dollars (as in didn't spend as fast as before 1930) in the Great Depression?"
How frequently money changes hands is not an independent variable, but is directly proportional to the frequency with which goods and services change hands.
You might as well refer to the "velocity of goods and services".
You are correct about the Weimer hyperinflation, but the marks were exchanged for something else at the same rate, so V = T. So what?
How frequently money changes hands is not an independent variable, but is directly proportional to the frequency with which goods and services change hands.
You might as well refer to the "velocity of goods and services".
You are correct about the Weimer hyperinflation, but the marks were exchanged for something else at the same rate, so V = T. So what?
That's the main and the classic fault and error of Austrians on velocity.
First they admit that money moves faster in an inflation (or slower in a deflation), then they pretend that V = T... while completely ignoring that the actual *amounts* of money in the various individual transactions is hugely different.
In an hyperinflation, the *total* money supply is just plain moving hugely faster, while the number of transactions doesn't grow much. You apparently understand that the transaction volume doesn't change much, so you're at least half way there.
A good analogy is the kid's game "hot potato", and with the number of potatoes growing fast.
As I said, disagreeing with reality is unwise at best.
Bart
"First they admit that money moves faster in an inflation (or slower in a deflation), then they pretend that V = T... while completely ignoring that the actual *amounts* of money in the various individual transactions is hugely different."
Perhaps this is just a problem with definitions. The *amount* of money necessary to buy a good or service doesn't change due to inflation or deflation, the *number of monetary units* changes.
The laws of supply and demand apply to money just as they apply to any other commodity.
An increase in the supply of any commodity generally results in a decrease in the exchange value (price) of each unit of that commodity.
The cost of a potato doesn't inflate or deflate in terms of other goods and services, only in terms of the number of units of the medium of exchange, frequently called "money". I may need to exchange more dollars for a prime rib dinner, but not more grains of gold or bushels of wheat or hours of washing dishes.
"In an hyperinflation, the *total* money supply is just plain moving hugely faster, while the number of transactions doesn't grow much. You apparently understand that the transaction volume doesn't change much, so you're at least half way there."
The *total* money supply only moves by changing hands in exchanges for other things. There is no swirling cloud of currency moving faster and faster as hyperinflation sets in.
If I no longer trust the currency I am only willing to take it in ever larger numbers of dollars or marks or whatever, for real goods and services, and then and only if I think I can exchange them quickly for other goods and services to some greater fool. That's not a higher V separate from T, only a larger number of fiat monetary units involved in each transaction.
"A good analogy is the kid's game "hot potato", and with the number of potatoes growing fast."
No it isn't. No one hands off ever larger amounts of currency without getting anything in exchange.
"As I said, disagreeing with reality is unwise at best."
Absolutely.
Perhaps this is just a problem with definitions. The *amount* of money necessary to buy a good or service doesn't change due to inflation or deflation, the *number of monetary units* changes.
Semantics, and only vaguely related to velocity which is relative speed.
And you said the same thing I did, the amount of money per transaction also changes - literally by the definition of inflation or hyperinflation.
The cost of a potato doesn't inflate or deflate in terms of other goods and services, only in terms of the number of units of the medium of exchange, frequently called "money". I may need to exchange more dollars for a prime rib dinner, but not more grains of gold or bushels of wheat or hours of washing dishes.
Again, that's (bringing in gold or wheat or whatever) totally unrelated to velocity, which is the relative speed that money moves through or in an economic system.
"In an hyperinflation, the *total* money supply is just plain moving hugely faster, while the number of transactions doesn't grow much. You apparently understand that the transaction volume doesn't change much, so you're at least half way there."
The *total* money supply only moves by changing hands in exchanges for other things. There is no swirling cloud of currency moving faster and faster as hyperinflation sets in.
Of course money changes hands during exchanges.
Coloring velocity as a swirling cloud doesn't change that it's still a measurement of how fast or slow the money moves through or in an economic system.
Of course, not understanding what velocity is and it's actual definition prevents most Austrians from understanding MV=PT.... or sometimes it's even a refusal to acknowledge how much faster money changes hands during a hyperinflation.
If I no longer trust the currency I am only willing to take it in ever larger numbers of dollars or marks or whatever, for real goods and services, and then and only if I think I can exchange them quickly for other goods and services to some greater fool. That's not a higher V separate from T, only a larger number of fiat monetary units involved in each transaction.
No one want to hold something that is rapidly depreciating in value any longer than they have to, so each person in all transactions spends it as fast as possible during a hyperinflation - and that's also called an increasing velocity of money.
You said it yourself with the word "quickly". Transaction count has little to nothing to do with how quickly each person wants to get rid of it.
"A good analogy is the kid's game "hot potato", and with the number of potatoes growing fast."
No it isn't. No one hands off ever larger amounts of currency without getting anything in exchange.
OF COURSE there are exchanges, but it's the speed with which currency or equivalents moves.
In Weimar, folk rushed to the store right after they got paid to try and beat any recent price increases. In the Great Depression, they were in no hurry.
That's called a difference in velocity, aka speed.
Bart
"Semantics, and only vaguely related to velocity which is relative speed.
And you said the same thing I did, the amount of money per transaction also changes - literally by the definition of inflation or hyperinflation."
No, I said something different. Perhaps it's my poor writing skills that prevent my meaning from being conveyed.
Let me try again.
Your view of money requires that money have some value outside of the goods and services that it can be exchanged for, mine does not.
Green pieces of paper have no intrinsic value and only represent real goods and services if we believe they do.
The balance in my checking account is no more than a bookkeeping entry, and has no value unless someone else is willing to exchange something real for the piece of paper I scribble on. and trust that they can exchange it for other things that are real.
How am I doing so far?
Me: "The cost of a potato doesn't inflate or deflate in terms of other goods and services, only in terms of the number of units of the medium of exchange, frequently called "money". I may need to exchange more dollars for a prime rib dinner, but not more grains of gold or bushels of wheat or hours of washing dishes."
You: "Again, that's (bringing in gold or wheat or whatever) totally unrelated to velocity, which is the relative speed that money moves through or in an economic system."
OK, let me try this:
Money moves by changing hands from one owner to another. Goods and services move by changing hands from one owner to another.
There is no movement of money from hand to hand without a reciprocal movement of goods and services from hand to hand.
Therefore in the equation MV = PT the total of transactions T must equal the total exchanges of money V. If V increases than T must increase proportionally. We could refer to T as the velocity of goods and services.
Are you claiming that V depends on the *number* of dollars exchanged per period or the agreed on *value* of those dollars?
Certainly the *number can vary, but their perceived *value* in terms of what they buy need not.
If I sell an apple for $1 and buy an orange from you every day for $1 the value to me of one orange is *one apple*. If due to an increase in the money supply (inflation) I now sell an apple every day for $2 and buy an orange from you for $2 the *value* to me of an orange hasn't changes. It's still one apple. Only the number of monetary units has changed. I wouldn't call that a change in V, would you?
If I began selling 2 apples a day at any price and buying 2 oranges at that same price, I suppose you could call that a doubling of V but you would also say that T has doubled. V = T. In any case the value to me of an orange is still one apple.
I'm not trying to insult you with simple examples, but I don't know how else to to explain my point with out a possible loss of meaning in translation.
Me: "The *total* money supply only moves by changing hands in exchanges for other things. There is no swirling cloud of currency moving faster and faster as hyperinflation sets in."
"Of course money changes hands during exchanges."
At the same rate as the goods and services.
"Coloring velocity as a swirling cloud doesn't change that it's still a measurement of how fast or slow the money moves through or in an economic system."
A swirling cloud is how I visualize money moving faster or slower when not tied directly to transactions which should also move faster or slower in lockstep.
Bart:
"Of course, not understanding what velocity is and it's actual definition prevents most Austrians from understanding MV=PT..."
I think Austrians understand it fine, they just don't find it to be very meaningful.
Feel free to explain it to me in very simple terms if you think I'm missing something, but as I see your view, either money has some value outside of it's intended use as a medium of exchange between actual things people value, or for some reason an increase in the the number of monetary units required in a given exchange means higher velocity, neither of which makes much sense.
"...or sometimes it's even a refusal to acknowledge how much faster money changes hands during a hyperinflation."
It's well understood that people wish to get rid of money as fast as they can when they feel it will lose value before lunchtime, but they STILL exchange it for something they DO value. There is no money changing hands outside of exchanges for something else. I cannot see a way to separate V from T. Please enlighten me.
If V does equal T then it can be removed from the equation, leaving M = P. Money supply equals prices. Increase money supply, increase prices. Big Whoop. Everybody knows that, although it's not quite that simple.
"No one want to hold something that is rapidly depreciating in value any longer than they have to, so each person in all transactions spends it as fast as possible during a hyperinflation - and that's also called an increasing velocity of money."
"You said it yourself with the word "quickly". Transaction count has little to nothing to do with how quickly each person wants to get rid of it."
Wanting doesn't matter. Doing matters. getting rid of money "quickly" requires exchanging it for something else "quickly" - a transaction. The quicker the "get rid of it" the quicker the "transactions".
Me: "No it isn't. No one hands off ever larger amounts of currency without getting anything in exchange."
You: "OF COURSE there are exchanges, but it's the speed with which currency or equivalents moves."
And that must be at the same speed as the other side of the exchange.
Isn't T the total of transactions?
"In Weimar, folk rushed to the store right after they got paid to try and beat any recent price increases."
No argument with hyperinflation, but as fast as they got rid of money, they got goods in exchange.
"In the Great Depression, they were in no hurry."
This is pure supply and demand. A decrease in the available money supply made money scarcer and therefore more valuable in relation to other things. The price of money went up or the price of other things went down, whichever you prefer.
Expecting prices to drop further can encourage hoarding money, but there are obvious lower limits to such a deflationary trend. Everyone needs to eat etc. and at some point must spend money to survive. Hoping for lower prices can only last for so long.
The equation for calculating gdp also depends on the society as a whole
That makes it no less valuable.
The total cost equation requires no such thing. It does require that all persons involved in a transaction be considered, not just the buyer and seller.
Government by majority rule has the responsibility to see to it that those with minority opinions are not discriminated against, economically or otherwise.
But such discrimination must be proven, not merely asserted. The majority has no obligation to consider what the minority simply feels to be true.
The whole point of this discussion is that there appears to be evidence That the law of supply and demand does not always behave in the real world as predicted in theory.
That laws needs considerable considerable work before we can use it with the same confidence as F=MA.
Ill bet there is more to that story.
"Ill bet there is more to that story."
Your last 4 comments make no sense as they have no context, and it's possible they wouldn't make sense even with context, but you should be aware that for most people, replies don't appear in a tree view as you do on that android device mobile browser, so there's no way to know what you're replying to.
You need to quote what you're responding to.
"The whole point of this discussion is that there appears to be evidence That the law of supply and demand does not always behave in the real world as predicted in theory."
What evidence is that?
This comment has been removed by the author.
"The equation for calculating gdp also depends on the society as a whole
That makes it no less valuable."
Nonsense. GDP is the *sum* of all individual transactions. "Society as a whole" neither produces nor exchanges anything.
Try again.
"Government by majority rule has the responsibility to see to it that those with minority opinions are not discriminated against, economically or otherwise.
But such discrimination must be proven, not merely asserted. The majority has no obligation to consider what the minority simply feels to be true."
It appears that you are unable to avoid groupthink.
Individuals are discriminated against, not "minorities", even though those individuals may be members of a minority.
Individuals have opinions, not minorities.
Individuals have responsibilities, not majorities, even though those individuals may be members of a majority.
individuals have obligations, not majorities.
Got it?
Ron H:
Sorry for the delay, I was pretty sick for a few days.
Your view of money requires that money have some value outside of the goods and services that it can be exchanged for, mine does not.
False
Green pieces of paper have no intrinsic value and only represent real goods and services if we believe they do.
A null statement, since it's true of money in general.
If I sell an apple for $1 and buy an orange from you every day for $1 the value to me of one orange is *one apple*. If due to an increase in the money supply (inflation) I now sell an apple every day for $2 and buy an orange from you for $2 the *value* to me of an orange hasn't changes. It's still one apple. Only the number of monetary units has changed. I wouldn't call that a change in V, would you?
You already stated it - M (money supply) changed, not V.
If I began selling 2 apples a day at any price and buying 2 oranges at that same price, I suppose you could call that a doubling of V but you would also say that T has doubled. V = T. In any case the value to me of an orange is still one apple.
Again - M changed, not V.
A swirling cloud is how I visualize money moving faster or slower when not tied directly to transactions which should also move faster or slower in lockstep.
Fair enough, but calling it a swirling cloud still doesn't change that velocity is a measurement of how relatively fast or slow money moves through or in an economic system, literally by definition.
I think Austrians understand it fine, they just don't find it to be very meaningful.
Of course not, since they think that V=T which is wrong per actual reality, history and even literally by definition. They also have little clue that it represents a speed difference (which translates into a varying effect on total money supply) - and that's all it represents.
The change of speed of money through an economy does exist, and is trivial to observe and prove in the real world (Weimar and the Great Depression being good examples).
Yet another example of where Austrians don't get it - let alone all the rest like saying that money moving out of a checking account and into an MMF suddenly isn't money anymore. Even Hayek didn't buy into that silliness, and way back in the 1930s too. Too bad that the current hidebound crew has gotten so stuck on such a limited, silly and false way to describe money supply.
And then there's the saddest one, that price changes can't be measured.
At least they still believe that the primary definition of money is a medium of exchange.
Transactions are not equal to velocity. They never are, and can't be. They have extremely different definitions, so to even vaguely say that they're equal to each other is like saying that apples=cars.
In an hyperinflation, money is spent right away on mostly food, clothing & shelter - 3 transactions per pay period as a ball park example, and assuming that I'm using the word transactions in the very odd sense that you seem to be.
Money never stays "under the mattress" in an hyperinflation as it does in a deflation. That's another observable and simple difference that again is related to speed and total money supply. That alone makes the Austrian velocity denial view into a shambles, since it denies what actually happens (aka reality) in an hyperinflation.
An economic school that denies, ignores, obfuscates or spins actual and observable reality has just proved that at least that portion of its theory is bogus and wrong.
(continued)
Feel free to explain it to me in very simple terms if you think I'm missing something...
I don't know how to make it any simpler than Weimar vs. the Great Depression.
Fiat money is a hot potato in an hyperinflation, and a much more valuable non hot potato in a deflation. It gets spent (moves through an economy) ultra fast in a hyperinflation and ultra slow in a deflation, comparatively.
Wanting doesn't matter. Doing matters.
Consider the word 'want' replaced with 'do' then. There's no difference in the context.
No argument with hyperinflation, but as fast as they got rid of money, they got goods in exchange.
Yes, and there were way fewer transactions in Weimar as I noted above - and again, assuming that I'm using the word transactions like you are.
A thousand marks in Weimar times did the 'duty' of many thousands of marks since it moved/circulated so fast (hot potato), when compared to pre hyperinflationary times. I hope that you can at least grant that, and if not then we're done since it's so obvious that it's what provably happened in the actual reality of the times, or in any other hyperinflation for that matter.
"In the Great Depression, they were in no hurry."
This is pure supply and demand. A decrease in the available money supply made money scarcer and therefore more valuable in relation to other things. The price of money went up or the price of other things went down, whichever you prefer.
So what? It's supply & demand (and all the rest, but reversed) in an hyperinflation too.
Money is not a hot potato in a deflation. There's no need or want to spend it fast, or as in a "not do" if you prefer.
Money also sits for a much longer relative time "under the mattress" in a deflation than during more normal times.
Now if you want to bring up how difficult it is to actually measure or calculate velocity, then at least we'd likely find some agreement.
Bart:
It appears that we are talking 2 different languages and I don't know what translator will work.
When I write "transaction" I mean an exchange. Two things change hands (ownership), one of them is most often money which is a medium of exchange, and represents whatever good or service I wish it to represent.
I said: "If I began selling 2 apples a day at any price and buying 2 oranges at that same price, I suppose you could call that a doubling of V but you would also say that T has doubled. V = T. In any case the value to me of an orange is still one apple."
You said: "Again - M changed, not V."
Why would you say M changed?
I made twice as many transactions (T?) today at the same price as before. We don't know (because I haven't stated) how many buyers bought apples from me (1 or 2) nor how many sellers I bought oranges from (1 or 2), so we know there are at least 3 actors in this market and perhaps 4 or 5 but as far as I can tell we have no way of knowing the size of M. I might even assume it DIDN'T change because P didn't change.
What would it take to change V in this simple example?
Try this: define T in MV=PT for me. Is it not the total of all transactions (exchanges)?
Perhaps Henry Hazlitt, one of my favorite Austrians can explain my position for me, as he's a much better writer than I am.
Feel free to provide references if you think it will help.
Otherwise, I don't know what to do. I suppose we will have to leave this issue in disagreement.
Ron H. said...
It appears that we are talking 2 different languages and I don't know what translator will work.
Same here, especially in the area of the real world changing speed of money flow between Weimar and the GD.
Thank goodness you defined T as I know it. I still have no clue on how you can equate them, since they're so completely different but at least we're in agreement on the T definition.
Why would you say M changed?
You said it yourself in your original post - "If due to an increase in the money supply".
What would it take to change V in this simple example?
I can't answer, there are too many unknowns. In ultra broad terms, velocity goes up with inflation expectations and down with deflation expectations.
As far as the Hazlitt article:
"The quantity theory as Fisher framed it assumed that "normally" the "price level" varies directly and proportionately with the supply of money.
But when careful statistical comparisons are made, it is found that this is not so."... that's just plain false, as I've proven with a super long term chart showing M3 and corrected CPI (my CPPI)
M3 vs. CPI/CPPI showing the strong link
And Hazlitt, while correctly noting the definition as "velocity of circulation" of that money but then fails by not recognizing that the main psychological factor IS actually velocity (in high or hyperinflation - as in the "hot potato" example).
His odd logic of not recognizing that circulation is the same as money moving through as economy is another large and strained fault. Money does move through an economy, by definition.
He is correct that debt cancellation does affect total money supply (MV), but in practice it really matters little in normal conditions - but does apply in a debt deflation as Fisher so clearly noted.
It's so weird to me that he does partly get it on velocity per "Though the velocity of circulation of money increases with speculation", but then fails to follow through.
I continue to note that Hazlitt and most other Austrians are partly blindered to MV=PT by their very odd and limited definition of money.
Hayek partially got it at least per, although even he missed that things like credit aren't money substitutes - you can use them directly as a medium of exchange:
"There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money".
-- Friedrich Hayek, Prices and Production, 1935, p. 96
I could easily continue to show all the many faults in the Hazlitt reference, but I don't think it would make much difference.
At least Hazlitt and I do agree on the difficulties in calculating velocity.
Bart:
Thanks for your responses. I am truly interested in understanding the difference in our understanding of V, as it appears that we agree on almost everything else.
"Thank goodness you defined T as I know it. I still have no clue on how you can equate them, since they're so completely different but at least we're in agreement on the T definition."
Check - There's one agreement.
Me: "Why would you say M changed?"
You: "You said it yourself in your original post - "If due to an increase in the money supply"."
OK, I wasn't clear then. In my later example that premise was no longer operable. :) I posited a doubling of the number of transactions (exchanges) at the same price as before. I assume we would both call that a doubling of T. I intended that M would NOT change by saying "at the same price".
Me: "What would it take to change V in this simple example?"
You: "I can't answer, there are too many unknowns. In ultra broad terms, velocity goes up with inflation expectations and down with deflation expectations."
So V is just a measure of consumer sentiment? An "animal spirit"?
"As far as the Hazlitt article:
"The quantity theory as Fisher framed it assumed that "normally" the "price level" varies directly and proportionately with the supply of money.
But when careful statistical comparisons are made, it is found that this is not so."... that's just plain false, as I've proven with a super long term chart showing M3 and corrected CPI (my CPPI)
M3 vs. CPI/CPPI showing the strong link"
My reading of Hazlitt on that point is that it is not an immediate and automatic relationship like the two ends of a see-saw. There are frictions and delays involved, and uneven effects on different actors as is the case with current excess bank reserves. The extra money "printed" recently hasn't found it's way to my pocket yet. Perhaps "directly and proportionately" is the problem phrase.
"And Hazlitt, while correctly noting the definition as "velocity of circulation" of that money but then fails by not recognizing that the main psychological factor IS actually velocity (in high or hyperinflation - as in the "hot potato" example)."
Without rereading it, I seem to recall that Hazlitt explains that money doesn't really "circulate", any more than goods and services "circulate". Money is at all times owned by someone.
"His odd logic of not recognizing that circulation is the same as money moving through as economy is another large and strained fault. Money does move through an economy, by definition."
Even though he uses it for consistency with the Fisher theory, Hazlitt objects to the term "circulation" as it implies a flow that doesn't really exist. All money is owned, and only "circulates" by changing hands from one owner to another.
"He is correct that debt cancellation does affect total money supply (MV), but in practice it really matters little in normal conditions - but does apply in a debt deflation as Fisher so clearly noted."
"It's so weird to me that he does partly get it on velocity per "Though the velocity of circulation of money increases with speculation", but then fails to follow through.
I continue to note that Hazlitt and most other Austrians are partly blindered to MV=PT by their very odd and limited definition of money."
For our purposes, I think any commonly understood definition of M1-M3 will do, as they represent most of the "money". I'm afraid of getting off into the weeds if we try to define money too precisely.
"Hayek partially got it at least per, although even he missed that things like credit aren't money substitutes - you can use them directly as a medium of exchange:
"There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money".
-- Friedrich Hayek, Prices and Production, 1935, p. 96"
I can't tell if you agree or disagree with Hayek here, but as I said I fear getting out in the weeds. I don't much care whether something is called "money" or a "money substitute", I don't think it matters to an explanation of V.
"I could easily continue to show all the many faults in the Hazlitt reference, but I don't think it would make much difference."
I agree. Thanks, but no thanks. :)
"At least Hazlitt and I do agree on the difficulties in calculating velocity."
OK: Here's what I now understand of your position on MV=PT
M - I think we agree.
P - although we haven't discussed it, I take it to be "average level of prices".
T - You have stated that we agree.
V - is some vague measure of consumer expectations of the direction in which P will move. Expectations of higher P causes consumers to spend money sooner to avoid higher prices. Expectations of Lower P may cause consumers to hold money longer as they anticipate even lower prices. When consumers have lost all confidence in the viability of the money and expect skyrocketing P, they will exchange money for real goods as fast as they possibly can. (hyperinflation).
Is that even close? If it is, then the pretty little equation MV=PT has lost any pretense of precision, and is just an incomplete way of stating obvious truisms that no one seriously questions. My understanding of hyperinflation has always been what I just described above, as has been my understanding of deflation.
The problem all along has been my inability to visualize money moving through an economy without moving from one owner to another through exchanges for something else. I am no closer to an epiphany.
If MV=PT is merely an expression of consumer sentiment, then I still don't see why it would be considered valuable.
Just to clarify:
I wrote: "My understanding of hyperinflation has always been what I just described above, as has been my understanding of deflation."
My understanding of deflation is that it's a decrease in the money supply relative to demand for money and is the opposite of inflation.
There can be no terrifying deflationary death spiral as few people will stand by with money in their pockets as they starve to death. The need for basic subsistence puts a floor under any deflationary trend.
The expectation of lower prices in the future loses it's attraction when you get hungry and the rent is due.
On the other hand it is inaccurate to call lower prices deflation if they occur due to competition for consumer dollars, as we should expect ever lower prices due to innovation, automation, and increased productivity.
Bart:
Another thought on Velocity is that your own ability to affect the "flow of money" through the economy is limited by the rate at which money flows to you. You can only spend your dollars once. If anticipating higher prices, you can spend your week's pay as soon as you get it to avoid those higher prices, but you can't spend again until your next payday.
Similarly if you anticipate lower prices you can hold your pay as long as possible, but at some point you must spend some of it to survive. You can't hold out longer than that.
Me: "Why would you say M changed?"
You: "You said it yourself in your original post - "If due to an increase in the money supply"."
OK, I wasn't clear then. In my later example that premise was no longer operable. :) I posited a doubling of the number of transactions (exchanges) at the same price as before. I assume we would both call that a doubling of T. I intended that M would NOT change by saying "at the same price".
Well at least you see why I answered that way.
And in your current example. I have no clue how that's a real world example. I can't think of any instance where GDP doubled like that, especially with no price increases.
Me: "What would it take to change V in this simple example?"
You: "I can't answer, there are too many unknowns. In ultra broad terms, velocity goes up with inflation expectations and down with deflation expectations."
So V is just a measure of consumer sentiment? An "animal spirit"?
That's the danger of trying to answer a very specific question. The real definition of V is speed of money through an economic system, but it is related in ultra broad terms, to relative inflationary expectations.
Wikipedia states:
The velocity of money (also called velocity of circulation and, much earlier, currency) is the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time. Velocity has to do with the amount of economic activity associated with a given money supply. When the period is understood, the velocity may be presented as a pure number; otherwise it should be given as a pure number over time.
http://en.wikipedia.org/wiki/Velocity_of_money
"As far as the Hazlitt article:
"The quantity theory as Fisher framed it assumed that "normally" the "price level" varies directly and proportionately with the supply of money.
But when careful statistical comparisons are made, it is found that this is not so."... that's just plain false, as I've proven with a super long term chart showing M3 and corrected CPI (my CPPI)
M3 vs. CPI/CPPI showing the strong link"
My reading of Hazlitt on that point is that it is not an immediate and automatic relationship like the two ends of a see-saw. There are frictions and delays involved, and uneven effects on different actors as is the case with current excess bank reserves. The extra money "printed" recently hasn't found it's way to my pocket yet. Perhaps "directly and proportionately" is the problem phrase.
"And Hazlitt, while correctly noting the definition as "velocity of circulation" of that money but then fails by not recognizing that the main psychological factor IS actually velocity (in high or hyperinflation - as in the "hot potato" example)."
Without rereading it, I seem to recall that Hazlitt explains that money doesn't really "circulate", any more than goods and services "circulate". Money is at all times owned by someone.
It sounds like we're in semantics-ville or extreme nuances here. I say money moves (and circulates as a synonym) and without assigning ownership, although it is virtually always owned by someone. But the primary factor is that money does move through an economy (and with varying speed). It matters little who owns it, but does matter for how long it is held/owned (time wise).
(continued)
"His odd logic of not recognizing that circulation is the same as money moving through as economy is another large and strained fault. Money does move through an economy, by definition."
Even though he uses it for consistency with the Fisher theory, Hazlitt objects to the term "circulation" as it implies a flow that doesn't really exist. All money is owned, and only "circulates" by changing hands from one owner to another.
But a flow *must* exist in order for the money to get from one person or entity to the next person or entity. That where Hazlitt (and most Austrians) get very strained at best to me.
"He is correct that debt cancellation does affect total money supply (MV), but in practice it really matters little in normal conditions - but does apply in a debt deflation as Fisher so clearly noted."
"It's so weird to me that he does partly get it on velocity per "Though the velocity of circulation of money increases with speculation", but then fails to follow through.
I continue to note that Hazlitt and most other Austrians are partly blindered to MV=PT by their very odd and limited definition of money."
For our purposes, I think any commonly understood definition of M1-M3 will do, as they represent most of the "money". I'm afraid of getting off into the weeds if we try to define money too precisely.
I understand but also think it may affect how well we understand the other if we don't go there. My M is *very* differet from the Austrian TMS or AMS.
Just in case, my basic definition is that total money supply includes not only M3 but also total credit and total Federal & State debt, with all double counting excluded. There are other items I include, but for now I want to keep it as simple as possible.
I can't tell if you agree or disagree with Hayek here, but as I said I fear getting out in the weeds. I don't much care whether something is called "money" or a "money substitute", I don't think it matters to an explanation of V.
I agree with him, as you probably gather by now since I just roughly defined what total money supply is to me, which is *very* unlike TMS or AMS.
"At least Hazlitt and I do agree on the difficulties in calculating velocity."
OK: Here's what I now understand of your position on MV=PT
M - I think we agree.
P - although we haven't discussed it, I take it to be "average level of prices".
T - You have stated that we agree.
V - is some vague measure of consumer expectations of the direction in which P will move. Expectations of higher P causes consumers to spend money sooner to avoid higher prices. Expectations of Lower P may cause consumers to hold money longer as they anticipate even lower prices. When consumers have lost all confidence in the viability of the money and expect skyrocketing P, they will exchange money for real goods as fast as they possibly can. (hyperinflation).
Is that even close? If it is, then the pretty little equation MV=PT has lost any pretense of precision, and is just an incomplete way of stating obvious truisms that no one seriously questions. My understanding of hyperinflation has always been what I just described above, as has been my understanding of deflation.
The problem all along has been my inability to visualize money moving through an economy without moving from one owner to another through exchanges for something else. I am no closer to an epiphany.
If MV=PT is merely an expression of consumer sentiment, then I still don't see why it would be considered valuable.
Hopefully what V is to me was clarified in my prior two posts. It's still speed of money movement through an economic system. The expectations bits were an attempt to show one of its primary drivers in the real world. It seems like your current definition is reasonably close, but I also want to stress that V is damn difficult to reliably measure - much like monetary time lags.
Whomever said that MV=PT is very precise? I'm unaware of anything at that high a level in economics or economic modeling that is terribly precise, and in any economic school.
I could of course link a number of charts that I've built that show "total money supply" with one of my velocity measures and there's certainly a decent correlation to inflation, but at the very least there's the missing factor of varying monetary time lags between when the money is created and when it affects inflation (or of course NGDP). It's a mess, to be matter of fact, as I've always at least implied by mentioning the difficulty of calculating V... but that also doesn't disprove that MV=PT isn't workable or usable, nor does it prove that V doesn't have substantial value in the real world.
Anyhow, hopefully my illustration and attempt to clarify that V does involve moving from owner to owner, but it's still a flow and movement.
My American Heritage, def'n #3 is "The passing of something, such as money or news, from place to place or person to person. Maybe that will help too.
Just to clarify:
I wrote: "My understanding of hyperinflation has always been what I just described above, as has been my understanding of deflation."
My understanding of deflation is that it's a decrease in the money supply relative to demand for money and is the opposite of inflation.
There can be no terrifying deflationary death spiral as few people will stand by with money in their pockets as they starve to death. The need for basic
subsistence puts a floor under any deflationary trend.
The expectation of lower prices in the future loses it's attraction when you get hungry and the rent is due.
On the other hand it is inaccurate to call lower prices deflation if they occur due to competition for consumer dollars, as we should expect ever lower prices
due to innovation, automation, and increased productivity.
Close enough for horseshoes, although there are some nuances I could bring up.
One of them is a pet peeve on the definition of inflation as "rising prices" that so many get a bit pissy on. If I say that "generally rising prices" are an
effect of inflation, would you agree? It's sure not a precision definition, but it's way more understandable to the average person. And "rising prices" alone is somewhat inaccurate.
Another thought on Velocity is that your own ability to affect the "flow of money" through the economy is limited by the rate at which money flows to you. You can only spend your dollars once. If anticipating higher prices, you can spend your week's pay as soon as you get it to avoid those higher prices, but you can't spend again until your next payday.
Similarly if you anticipate lower prices you can hold your pay as long as possible, but at some point you must spend some of it to survive. You can't hold out longer than that.
No disagreements there... shocking! -g-
"It sounds like we're in semantics-ville or extreme nuances here."
Probably, and I don't think we are that far apart.
"I say money moves (and circulates as a synonym) and without assigning ownership..."
OK so far.
"...although it is virtually always owned by someone."
May I remove the word virtually? If not can you provide an example of money that isn't owned?
"But the primary factor is that money does move through an economy (and with varying speed). It matters little who owns it, but does matter for how long it is held/owned (time wise)."
OK, no argument with that, BUT...
Each time it changes ownership there is an equal and opposite change of ownership of goods and services. No?
If you are tracking a physical $1 bill from hand to hand you could say that it changed ownership 10 times this week as opposed to 5 times last week. Is that what you call increased velocity?
Most money isn't physical, so I don't see how that would be useful.
"But a flow *must* exist in order for the money to get from one person or entity to the next person or entity. That where Hazlitt (and most Austrians) get very strained at best to me."
Agereed: money flows from one owner to the next. So do goods. My car flowed from the manufacturer to the dealer to me to my son to his neighbor to the neighbors son to the junk yard to the scrap metal processor. Each time it flowed from one owner to the next, money flowed in the opposite direction. There was no time when either car or money was unowned, and I have no way of determining velocity as I can't tell if the same money was used each time or if each exchange involved different money. I only know that car and money flowed at the same rate in each case, and at the same instant ownership was exchanged.
"I understand but also think it may affect how well we understand the other if we don't go there. My M is *very* differet from the Austrian TMS or AMS.
Just in case, my basic definition is that total money supply includes not only M3 but also total credit and total Federal & State debt, with all double counting excluded. There are other items I include, but for now I want to keep it as simple as possible."
I have no problem with that. What ever you wish to call money we will call money as long as we are consistant. The only difference it could make would be the size of M. I don't think it changes anything about V. For example I don't think a discussion of whether savings accounts or MMFs are or are not money is relevent to this discussion.
"One of them is a pet peeve on the definition of inflation as "rising prices" that so many get a bit pissy on. If I say that "generally rising prices" are an effect of inflation, would you agree? It's sure not a precision definition, but it's way more understandable to the average person. And "rising prices" alone is somewhat inaccurate."
That's one of mine too. I would say that inflation is an increase in the money supply at a rate faster than the rate of increase in the demand for money. Generally rising prices are indeed an *effect* or *result* of inflation, not the cause. Obviously all prices can't rise without an increase in the money supply. This is basic supply and demand. Like any other commodity, an increase in supply above an increase in demand generally lowers the price.
In all fairness politicians and their economists use the term "inflation" to mean rising prices all the time, so what are people to think?
In fact I've been told by snippy people that I should be careful to specify whether I'm referring to "price inflation" or "monetary inflation. That's usually pretty close to the end of the conversation.
"...although it is virtually always owned by someone."
May I remove the word virtually? If not can you provide an example of money that isn't owned?
Yes, removing it is fine in this context... I'm a bit gun shy on absolutes. There probably is a nanosecond in the very middle of the transaction where neither owns the money.
If you are tracking a physical $1 bill from hand to hand you could say that it changed ownership 10 times this week as opposed to 5 times last week. Is that what you call increased velocity?
Yes, although somewhat guardedly due to possible semantics issues.
In theory, if all money of all types changed ownership 10 times this week and 5 times last week, velocity would have doubled and very much acted like total money supply had also doubled.
Most money isn't physical, so I don't see how that would be useful.
In my opinion, it applies to any transaction involving money - and this is perhaps where my definition of total money supply and the Austrian one clash enough to confuse and bollix the issue of MV=PT?
Agreed: money flows from one owner to the next. So do goods. My car flowed from the manufacturer to the dealer to me to my son to his neighbor to the neighbors son to the junk yard to the scrap metal processor. Each time it flowed from one owner to the next, money flowed in the opposite direction. There was no time when either car or money was unowned, and I have no way of determining velocity as I can't tell if the same money was used each time or if each exchange involved different money. I only know that car and money flowed at the same rate in each case, and at the same instant ownership was exchanged.
It appears so, but I'm not sure where you're going with it.
"I understand but also think it may affect how well we understand the other if we don't go there. My M is *very* differet from the Austrian TMS or AMS.
Just in case, my basic definition is that total money supply includes not only M3 but also total credit and total Federal & State debt, with all double counting excluded. There are other items I include, but for now I want to keep it as simple as possible."
I have no problem with that. What ever you wish to call money we will call money as long as we are consistant. The only difference it could make would be the size of M. I don't think it changes anything about V. For example I don't think a discussion of whether savings accounts or MMFs are or are not money is relevent to this discussion.
True enough, although your comment above about physical and non physical money and usefullness of V makes me wonder.
"One of them is a pet peeve on the definition of inflation as "rising prices" that so many get a bit pissy on. If I say that "generally rising prices" are an effect of inflation, would you agree? It's sure not a precision definition, but it's way more understandable to the average person. And "rising prices" alone is somewhat inaccurate."
That's one of mine too. I would say that inflation is an increase in the money supply at a rate faster than the rate of increase in the demand for money. Generally rising prices are indeed an *effect* or *result* of inflation, not the cause. Obviously all prices can't rise without an increase in the money supply. This is basic supply and demand. Like any other commodity, an increase in supply above an increase in demand generally lowers the price.
In all fairness politicians and their economists use the term "inflation" to mean rising prices all the time, so what are people to think?
Exactly, the wonderful world of either just plain really poor education, or vested interest based spin, doesn't exasctly help the average person. Very much so on 'generally rising prices' being an effect too.
My preference on a simple inflation definition is "more money than good & services". It avoids the usual supply & demand misunderstandings and varying definitiona and interpretations.
In fact I've been told by snippy people that I should be careful to specify whether I'm referring to "price inflation" or "monetary inflation. That's usually pretty close to the end of the conversation.
Been there. Seen & done that. Have too many T-shirts documenting the *special* moments. -g-
"In my opinion, it applies to any transaction involving money - and this is perhaps where my definition of total money supply and the Austrian one clash enough to confuse and bollix the issue of MV=PT?"
Nope, No confusion. If it is used as a medium of exchange we can call it money as long as stays money at all times. Whatever is money now will stay money. And, the initial size of M doesn't matter, only changes, if any, matter.
"True enough, although your comment above about physical and non physical money and usefullness of V makes me wonder."
I was trying to make sure that physical currency isn't necessary to make V work. Obviously you could track a physical dollar and say it went from a to b to c to d to e last week, and from a to b, c, d, e, f, g, h, i, j this week, thus 10 vs 5 exchanges and V doubled. In each of those transactions there was a physical exchange. There was also a physical exchange of goods. 5 last week and 10 this week. Did T double also?
In the real world there isn't necessarily a physical exchange of anything, only a re-balancing of ledger sheets. How can I say how much work any one dollar did or how much it circulated?
I gotta say, I still can't see any way to disconnect money flow from goods flow.
The point about my car was to demonstrate that goods can be said to flow or circulate as easily as I can say money flows or circulates.
The car flowed from hand to hand, and at no time (except maybe for a nanosecond if you wish) was it unowned. If the car had changed owners twice as often, could I say the "velocity of car" doubled?
You know, Bart, I'm not trying to be obtuse here. People talk of the "velocity of circulation", so there is obviously some meaning they ascribe to it, but I just don't get what it is. I can understand money "flowing" faster through an economy, but almost all those transactions include an opposite flow of goods. In other words I cant envision V changing without T changing.
"In my opinion, it applies to any transaction involving money - and this is perhaps where my definition of total money supply and the Austrian one clash enough to confuse and bollix the issue of MV=PT?"
Nope, No confusion. If it is used as a medium of exchange we can call it money as long as stays money at all times. Whatever is money now will stay money. And, the initial size of M doesn't matter, only changes, if any, matter.
Cool... barring any more unknown nuances or other semantics issues.
"True enough, although your comment above about physical and non physical money and usefullness of V makes me wonder."
I was trying to make sure that physical currency isn't necessary to make V work. Obviously you could track a physical dollar and say it went from a to b to c to d to e last week, and from a to b, c, d, e, f, g, h, i, j this week, thus 10 vs 5 exchanges and V doubled. In each of those transactions there was a physical exchange. There was also a physical exchange of goods. 5 last week and 10 this week. Did T double also?
In the real world there isn't necessarily a physical exchange of anything, only a re-balancing of ledger sheets. How can I say how much work any one dollar did or how much it circulated?
I gotta say, I still can't see any way to disconnect money flow from goods flow.
Got it now on why you used "physical". As far as T doubling, yes it sounds like it did.
And yes, it's damn near 100% impossible to say what any given dollar did unless they all had GPS and RFID chips. And welcome to my world on trying to estimate velocity.
You can't disconnect money flows from good flows either, and it's implicit in MV=PT and also in any economy.
Let's try this as an example, maybe it'll help.
It's 1922 Weimar and I buy a widget for 500K marks in one transaction.
It's now 1923 and money supply has doubled and velocity has doubled, and now I buy another identical widget but it costs 2000K marks.
M has doubled, V has doubled, so P has quadrupled... but T is still one.
You know, Bart, I'm not trying to be obtuse here. People talk of the "velocity of circulation", so there is obviously some meaning they ascribe to it, but I just don't get what it is. I can understand money "flowing" faster through an economy, but almost all those transactions include an opposite flow of goods. In other words I cant envision V changing without T changing.
I'm hanging in there, partly because I've been here before and your views aren't unfamiliar to me. You also don't *at all* seem like you're jerking me around or trolling.
Hopefully that example in my last post will help.
The point about my car was to demonstrate that goods can be said to flow or circulate as easily as I can say money flows or circulates.
The car flowed from hand to hand, and at no time (except maybe for a nanosecond if you wish) was it unowned. If the car had changed owners twice as often, could I say the "velocity of car" doubled?
It depends on how fast you drive the car? (I know, bad joke/pun, but I couldn't resist -g-)
Truth on the car basically moving or "circulating".
But if it changed hands twice as often, that would be a doubling of T. Velocity only applies to money.
By the way, from here it does seem like we're making progress.
"By the way, from here it does seem like we're making progress."
Great! I hope so. It seems that we have eliminated nearly every possible difference in understanding except *the one*.
"You can't disconnect money flows from good flows either, and it's implicit in MV=PT and also in any economy."
Oops!! I spoke too soon. As I understand that it means that "all else being equal" - I know, that's never really the case - but with M unchanged and P unchanged it appears that any delta V would equal delta T and that's right where I started. Is that really what you meant to write?
"Let's try this as an example, maybe it'll help.
It's 1922 Weimar and I buy a widget for 500K marks in one transaction.
It's now 1923 and money supply has doubled and velocity has doubled, and now I buy another identical widget but it costs 2000K marks.
M has doubled, V has doubled, so P has quadrupled... but T is still one."
I love it! Partly because it's entirely your example so only I can possibly misunderstand it. :)
Here we go:
"It's 1922 Weimar and I buy a widget for 500K marks in one transaction."
Absolutely clear.
"It's now 1923 and money supply has doubled..."
OK, this implies government in this little economy that controls money supply and has printed money from thin air to pay government expenditures, that are somehow outside the economy. That's OK with me if it's OK with you. In any case, I don't think we understand inflation differently, so M doubling isn't a problem...Well, you know what I mean.
"...and velocity has doubled..."
I will ask about that at the end.
"...and now I buy another identical widget but it costs 2000K marks."
T is unchanged.
OK, assuming there are only 2 actors in this economy, you and Widget-guy plus, of course, Weimar the government which is necessary to the doubling of M
Assuming we need not discuss your source of marks nor Widget-guy's source of widgets, by what *mechanism* has V doubled?
"M has doubled, V has doubled, so P has quadrupled... but T is still one."
The math is fine, but my problem remains. I think I'm clear on M, P, and T but not V.
"I'm hanging in there, partly because I've been here before and your views aren't unfamiliar to me. You also don't *at all* seem like you're jerking me around or trolling."
Good, because my intentions are pure. :) Thanks for your patience. I would really LOVE to understand what V means to you and others who use the term, even if eventually I don't agree with it.
"And yes, it's damn near 100% impossible to say what any given dollar did unless they all had GPS and RFID chips. And welcome to my world on trying to estimate velocity."
Please take this as the honest question it is, but is it possible the difficulty in measuring V indicates that there's not really anything significant to measure outside the context of T?
In 1922 Weimar the government printed money until the presses smoked in order to cover government spending that couldn't possibly be covered by taxes on actual production. People saw prices rising at astronomical rates because of this, and spent the ever shrinking marks as quickley as possible to avoid even higher prices later the same day.
Still there are limits. Payday only comes once a week or whatever, and even if your pay rate doubles every week prices are rising even faster so you spend the money for real goods as soon as you can. Holding money for shorter periods doesn't necessarily mean spending at a faster rate. You can only buy so much fresh food at one time as it will spoil. The grocer you dumped the money on has the same problem. Farmers can only increase production a limited amount in response to higher demand, etc., etc.
In my view, Weimar had way more to do with the distortions caused by an out of control M than anything called V.
"By the way, from here it does seem like we're making progress."
Great! I hope so. It seems that we have eliminated nearly every possible difference in understanding except *the one*.
Sometimes going back to bedrock is the only way, and sometimes it doesn't work.
"You can't disconnect money flows from good flows either, and it's implicit in MV=PT and also in any economy."
Oops!! I spoke too soon. As I understand that it means that "all else being equal" - I know, that's never really the case - but with M unchanged and P unchanged it appears that any delta V would equal delta T and that's right where I started. Is that really what you meant to write?
Nope, no "all else being equal". An economy can't exist without Money, Prices and Transactions... and Velocity is just a modifier for Money so that MV means total money supply. M and V can't be separated in the formula, and total checking accounts turn over way more than once a year for example.
"Let's try this as an example, maybe it'll help.
It's 1922 Weimar and I buy a widget for 500K marks in one transaction.
It's now 1923 and money supply has doubled and velocity has doubled, and now I buy another identical widget but it costs 2000K marks.
M has doubled, V has doubled, so P has quadrupled... but T is still one."
I love it! Partly because it's entirely your example so only I can possibly misunderstand it. :)
Here we go:
... *removed*
OK, assuming there are only 2 actors in this economy, you and Widget-guy plus, of course, Weimar the government which is necessary to the doubling of M
Assuming we need not discuss your source of marks nor Widget-guy's source of widgets, by what *mechanism* has V doubled?
Bottom line and in general, people's (including corporations, banks, etc.) actions. They spend (move) their money faster during that hyperinflation than before that hyperinflation - the "hot potato" effect.
"M has doubled, V has doubled, so P has quadrupled... but T is still one."
The math is fine, but my problem remains. I think I'm clear on M, P, and T but not V.
Do you agree (just double checking since I though you did) that money does move faster during inflations than during deflations, in general?
"I'm hanging in there, partly because I've been here before and your views aren't unfamiliar to me. You also don't *at all* seem like you're jerking me around or trolling."
Good, because my intentions are pure. :) Thanks for your patience. I would really LOVE to understand what V means to you and others who use the term, even if eventually I don't agree with it.
I'm sure still hanging in there, and obviously have little clue why I can't get the concept across too.
"And yes, it's damn near 100% impossible to say what any given dollar did unless they all had GPS and RFID chips. And welcome to my world on trying to estimate velocity."
Please take this as the honest question it is, but is it possible the difficulty in measuring V indicates that there's not really anything significant to measure outside the context of T?
As I just asked above, I thought that you agreed that cash (going for even more simplicity and just using cash in place of all money) moves much faster during an inflation than a deflation?
I also gave you an (limited of course, for illustration purposes) example of how M, V & P changed but T didn't since you said you couldn't imagine one.
Wasn't that a possible real transaction in both 1922 and 1923? Couldn't it aso be extended?
I'm getting more & more tempted to post one of my sort of MV=PT experimental charts, but am afraid it wouldn't help - even though using V demonstrably closes the gap between M and P against T - and that's the proof of its substantial value.
In 1922 Weimar the government printed money until the presses smoked in order to cover government spending that couldn't possibly be covered by taxes on actual production. People saw prices rising at astronomical rates because of this, and spent the ever shrinking marks as quickly as possible to avoid even higher prices later the same day.
Still there are limits. Payday only comes once a week or whatever, and even if your pay rate doubles every week prices are rising even faster so you spend the money for real goods as soon as you can. Holding money for shorter periods doesn't necessarily mean spending at a faster rate. You can only buy so much fresh food at one time as it will spoil. The grocer you dumped the money on has the same problem. Farmers can only increase production a limited amount in response to higher demand, etc., etc.
In my view, Weimar had way more to do with the distortions caused by an out of control M than anything called V.
It's not just the individual payday when the consumer rushes to spend, but then the grocer rushes to pay his bills and get more flour, and then the grain mill rushes to pay his bills and get more grain, and then the farmer rushes to pay his bills and get more seed and fertilizer... and on and on and on. Cash is really *zooming*.
And of course Weimar was more about an out of control M than V, but the out of control M sort of *creates* a way higher V. You can't get a very high V without an out of control M.
And again and just in case, V is just a modifier for M.
Damn I'm tired, hope that was at least mostly clear.
"Nope, no "all else being equal". An economy can't exist without Money, Prices and Transactions... "
If I said that an economy can't exist without transactions, that prices are a measure of the value of one thing in terms of another (for instance the price of an apple in terms of oranges or the price of an orange in terms of apples), and that money is a clever medium of exchange used to represent whatever we wish, so we need not bring actual apples or oranges to an exchange, would that differ from your statement above in any way?
"and Velocity is just a modifier for Money so that MV means total money supply. M and V can't be separated in the formula, and total checking accounts turn over way more than once a year for example."
Please describe total checking accounts turning over. That might help.
"Bottom line and in general, people's (including corporations, banks, etc.) actions. They spend (move) their money faster during that hyperinflation than before that hyperinflation - the "hot potato" effect."
What do they spend (move) their money on at a greater rate than before?
What transactions other than exchanges take place, and how can money be spent at a greater rate than it is earned?
Even if my pay doubles each week, (due to a doubling of M?) I can still only spend 1 paycheck/wk.
I am ignoring the possibility that my employer might delay paying me as long as possible in order to pay with cheaper dollars.
"Do you agree (just double checking since I though you did) that money does move faster during inflations than during deflations, in general?"
I did say that, and if "faster" means sooner, than yes. During an inflation people will hold money for a shorter period of time, and during a deflation for a longer period of time due to an expectation of higher future prices or lower future prices respectively.
In an inflation, if I'm paid on Monday I may spend as much as I can on Monday rather than in dribs and drabs during the week. However, I'm not buying MORE during the week, I'm just holding the money for a shorter time.
In a deflation I may wait 'til Friday to spend, anticipating lower pries, but again no change in the RATE at which I'm spending. It's still 1 paycheck/wk.
"I also gave you an (limited of course, for illustration purposes) example of how M, V & P changed but T didn't since you said you couldn't imagine one."
I can easily imagine T changing, meaning more or *fewer* exchanges (*fewer* being one of our grammar lesson words), but with changes in M and/or P.
"Wasn't that a possible real transaction in both 1922 and 1923? Couldn't it aso be extended?"
Yes and yes. Those are real transactions and could be extended to any number of transactions.
"I'm getting more & more tempted to post one of my sort of MV=PT experimental charts, but am afraid it wouldn't help - even though using V demonstrably closes the gap between M and P against T - and that's the proof of its substantial value."
Please do. At this point I don't see how it could possibly hurt. :)
"As I just asked above, I thought that you agreed that cash (going for even more simplicity and just using cash in place of all money) moves much faster during an inflation than a deflation?"
Yes, as above cash is held for a shorter period or a longer period, but to describe a higher RATE, as in more dollars/week requires - to my mind - a higher rate of exchanges, more goods/week, higher T.
If I'm paid $100/wk I can spend $100 right after I'm paid, just before I'm paid again, or all during the week, but each of these is a RATE of $100/wk. T didn't change, only the length of time the money is held.
Those I do business with have the same limits. My grocer sells $1000/wk and can spend that money as soon as he gets it, hold it as long as possible, or spend it as needed but his spending is still at a rate of $1000/wk. Any change in RATE would require that T changes, no?
"It's not just the individual payday when the consumer rushes to spend, but then the grocer rushes to pay his bills and get more flour, and then the grain mill rushes to pay his bills and get more grain, and then the farmer rushes to pay his bills and get more seed and fertilizer... and on and on and on. Cash is really *zooming*."
Yes, that is clear, but as I see it these "rushings" only have an effect once. None of these actors can spend at a higher rate than they receive it. The grain mill may "rush" to buy grain, but they, like me, can't spend money before they get it, and are limited by the physical realities of getting grain to the mill and then selling flour to get more money to buy more grain, just as I am limited by the time required to get my pay to the grocer to spend it. I just can't seem to do it in less than 1 hour, no matter how hard I try.
Next week everyone's spending will happen as quickly as it did this week. In other words, it won't change. Everyone will already be getting rid of money as quickly as they can.
This assumes no change in quantity of grain bought, or groceries bought etc.,as in no changes of T.
And I know the farmer isn't buying more fertilizer than before as I am not making more of it than I did last week, and my (inflation adjusted) income was the same this week as last week. Farmer just rushed in and grabbed the same size bag he always buys as soon as it was filled rather than waiting for my employee to put it in his truck. He can't get it any sooner than that, and it's unlikely the grain he grows is aware that everyone is in a hurry, so it will probably take as long as usual to ripen. If he plants and sells MORE grain, he will have to raise his T.
Hmm...I guess I won't need that employee any more to fill peoples fertilizer orders. Too bad for him. :)
If Farmer starts buying more than one bag of fertilizer I will have to raise my T.
"Nope, no "all else being equal". An economy can't exist without Money, Prices and Transactions... "
If I said that an economy can't exist without transactions, that prices are a measure of the value of one thing in terms of another (for instance the price of an apple in terms of oranges or the price of an orange in terms of apples), and that money is a clever medium of exchange used to represent whatever we wish, so we need not bring actual apples or oranges to an exchange, would that differ from your statement above in any way?
I'm unaware of any difference, but am still wary of nuances.
"and Velocity is just a modifier for Money so that MV means total money supply. M and V can't be separated in the formula, and total checking accounts turn over way more than once a year for example."
Please describe total checking accounts turning over. That might help.
Money flows info checking accounts via deposits, and then flows out via payments/checks. It happens multiple times per year or pay period, and "turns over" more than once per year.
"Do you agree (just double checking since I though you did) that money does move faster during inflations than during deflations, in general?"
I did say that, and if "faster" means sooner, than yes. During an inflation people will hold money for a shorter period of time, and during a deflation for a longer period of time due to an expectation of higher future prices or lower future prices respectively.
In an inflation, if I'm paid on Monday I may spend as much as I can on Monday rather than in dribs and drabs during the week. However, I'm not buying MORE during the week, I'm just holding the money for a shorter time.
You've just described velocity.
"Wasn't that a possible real transaction in both 1922 and 1923? Couldn't it aso be extended?"
Yes and yes. Those are real transactions and could be extended to any number of transactions.
You've just described velocity again. It's sort of a multiplier of M (except in deflations) that produces 'total money supply'.
"I'm getting more & more tempted to post one of my sort of MV=PT experimental charts, but am afraid it wouldn't help - even though using V demonstrably closes the gap between M and P against T - and that's the proof of its substantial value."
Please do. At this point I don't see how it could possibly hurt. :)
Maybe I will at some point, but I think right now that it would not help in clarifying.
"As I just asked above, I thought that you agreed that cash (going for even more simplicity and just using cash in place of all money) moves much faster during an inflation than a deflation?"
Yes, as above cash is held for a shorter period or a longer period, but to describe a higher RATE, as in more dollars/week requires - to my mind - a higher rate of exchanges, more goods/week, higher T.
If I'm paid $100/wk I can spend $100 right after I'm paid, just before I'm paid again, or all during the week, but each of these is a RATE of $100/wk. T didn't change, only the length of time the money is held.
Those I do business with have the same limits. My grocer sells $1000/wk and can spend that money as soon as he gets it, hold it as long as possible, or spend it as needed but his spending is still at a rate of $1000/wk. Any change in RATE would require that T changes, no?
But we still have:
"It's 1922 Weimar and I buy a widget for 500K marks in one transaction.
It's now 1923 and money supply has doubled and velocity has doubled, and now I buy another identical widget but it costs 2000K marks.
M has doubled, V has doubled, so P has quadrupled... but T is still one."
And that assumes no purchasing power loss in marks.
Hyperinflation involves a loss of purchasing power, so actual apples-to-apples value based transaction counts don't go up. Total transactions *may* go up, but they're not usually apples-to-apples comparisons if so. Real GDP goes down in an hyperinflation.
"Nope, no "all else being equal". An economy can't exist without Money, Prices and Transactions... "
If I said that an economy can't exist without transactions, that prices are a measure of the value of one thing in terms of another (for instance the price of an apple in terms of oranges or the price of an orange in terms of apples), and that money is a clever medium of exchange used to represent whatever we wish, so we need not bring actual apples or oranges to an exchange, would that differ from your statement above in any way?
I'm unaware of any difference, but am still wary of nuances.
"and Velocity is just a modifier for Money so that MV means total money supply. M and V can't be separated in the formula, and total checking accounts turn over way more than once a year for example."
Please describe total checking accounts turning over. That might help.
Money flows info checking accounts via deposits, and then flows out via payments/checks. It happens multiple times per year or pay period, and "turns over" more than once per year.
"Do you agree (just double checking since I though you did) that money does move faster during inflations than during deflations, in general?"
I did say that, and if "faster" means sooner, than yes. During an inflation people will hold money for a shorter period of time, and during a deflation for a longer period of time due to an expectation of higher future prices or lower future prices respectively.
In an inflation, if I'm paid on Monday I may spend as much as I can on Monday rather than in dribs and drabs during the week. However, I'm not buying MORE during the week, I'm just holding the money for a shorter time.
You've just described velocity.
"Wasn't that a possible real transaction in both 1922 and 1923? Couldn't it aso be extended?"
Yes and yes. Those are real transactions and could be extended to any number of transactions.
You've just described velocity again. It's sort of a multiplier of M (except in deflations) that produces 'total money supply'.
test
"Nope, no "all else being equal". An economy can't exist without Money, Prices and Transactions... "
If I said that an economy can't exist without transactions, that prices are a measure of the value of one thing in terms of another (for instance the price of an apple in terms of oranges or the price of an orange in terms of apples), and that money is a clever medium of exchange used to represent whatever we wish, so we need not bring actual apples or oranges to an exchange, would that differ from your statement above in any way?
I'm unaware of any difference, but am still wary of nuances.
"and Velocity is just a modifier for Money so that MV means total money supply. M and V can't be separated in the formula, and total checking accounts turn over way more than once a year for example."
Please describe total checking accounts turning over. That might help.
Money flows info checking accounts via deposits, and then flows out via payments/checks. It happens multiple times per year or pay period, and "turns over" more than once per year.
"Do you agree (just double checking since I though you did) that money does move faster during inflations than during deflations, in general?"
I did say that, and if "faster" means sooner, than yes. During an inflation people will hold money for a shorter period of time, and during a deflation for a longer period of time due to an expectation of higher future prices or lower future prices respectively.
In an inflation, if I'm paid on Monday I may spend as much as I can on Monday rather than in dribs and drabs during the week. However, I'm not buying MORE during the week, I'm just holding the money for a shorter time.
You've just described velocity.
"Wasn't that a possible real transaction in both 1922 and 1923? Couldn't it aso be extended?"
Yes and yes. Those are real transactions and could be extended to any number of transactions.
You've just described velocity again. It's sort of a multiplier of M (except in deflations) that produces 'total money supply'.
"I'm getting more & more tempted to post one of my sort of MV=PT experimental charts, but am afraid it wouldn't help - even though using V demonstrably closes the gap between M and P against T - and that's the proof of its substantial value."
Please do. At this point I don't see how it could possibly hurt. :)
Maybe I will at some point, but I think right now that it would not help in clarifying.
"As I just asked above, I thought that you agreed that cash (going for even more simplicity and just using cash in place of all money) moves much faster during an inflation than a deflation?"
Yes, as above cash is held for a shorter period or a longer period, but to describe a higher RATE, as in more dollars/week requires - to my mind - a higher rate of exchanges, more goods/week, higher T.
If I'm paid $100/wk I can spend $100 right after I'm paid, just before I'm paid again, or all during the week, but each of these is a RATE of $100/wk. T didn't change, only the length of time the money is held.
Those I do business with have the same limits. My grocer sells $1000/wk and can spend that money as soon as he gets it, hold it as long as possible, or spend
it as needed but his spending is still at a rate of $1000/wk. Any change in RATE would require that T changes, no?
And we still have:
"It's 1922 Weimar and I buy a widget for 500K marks in one transaction.
It's now 1923 and money supply has doubled and velocity has doubled, and now I buy another identical widget but it costs 2000K marks.
M has doubled, V has doubled, so P has quadrupled... but T is still one."
And that assumes no purchasing power loss in marks.
Hyperinflation involves a loss of purchasing power, so actual apples-to-apples value based transaction counts don't go up. Total transactions *could* go up, but
they're not apples-to-apples comparisons if so.
Real GDP goes down in an hyperinflation, velocity doesn't.
"You've just described velocity."
OMG! I was looking for an elephant and it's really an ant.
"And we still have:
"It's 1922 Weimar and I buy a widget for 500K marks in one transaction.
It's now 1923 and money supply has doubled and velocity has doubled, and now I buy another identical widget but it costs 2000K marks.
M has doubled, V has doubled, so P has quadrupled... but T is still one."
1. "And that assumes no purchasing power loss in marks."
2. "Hyperinflation involves a loss of purchasing power..."
What the hell? Which is it? Doesn't a cheaper mark and/or a loss of confidence in the money mean a loss of purchasing power?
"Total transactions *could* go up, but they're not apples-to-apples comparisons if so."
That would be an increases in T.
So here's what I *think* I now know about V:
V is a measure of sentiment and a *symptom* of that sentiment is a propensity to spend money either sooner or later based on one's expectation of future prices being either higher or lower.
This causes money to be held for a shorter or longer time, to avoid anticipated higher prices or to take advantage of anticipated lower prices. V does not represent a different RATE of spending, which would require a corresponding and equal change in the RATE of transactions which would change the VOLUME of transactions, T.
There is a limit to deflation at the point of buying bare necessities.
There are limits to the effect of V on the movement of money in an inflation or hyperinflation:
1. Due to an inability to spend money not yet in hand, and the fact that you can only spend your income once. My previous comments about Farmer et al described that limit.
2. There are opposing forces at work in that money owed (debt, wages) will be paid as late as possible, while money spent on goods will be spent as soon as possible.
If my understanding is close to correct, and V is mostly a measure of sentiment, then I'm not sure it's useful to say velocity has doubled any more than I would say that I'm "twice as fearful" or that "I like apples "1.74 times as much as I like bananas".
While I suppose P could double over and above a doubling of M due to sellers attempting to stay ahead of inflation, all the same pressures - particularly competition - that keep prices from rising in normal times would still be present in a hyperinflation.
Please point out any disagreements you have.
Bart, I appreciate your time and patience on this.
(blogger just ate my previous post and I didn't save it, damn!)
"You've just described velocity."
OMG! I was looking for an elephant and it's really an ant.
Sometimes it's an ant, some its an elephant. In Weimar and the GD, it was an elephant.
The period since 2000 in the US, it has been substantial per the various "accepted" definitions.
In the 80s in the US, it was an ant.
"And we still have:
"It's 1922 Weimar and I buy a widget for 500K marks in one transaction.
It's now 1923 and money supply has doubled and velocity has doubled, and now I buy another identical widget but it costs 2000K marks.
M has doubled, V has doubled, so P has quadrupled... but T is still one."
1. "And that assumes no purchasing power loss in marks."
2. "Hyperinflation involves a loss of purchasing power..."
What the hell? Which is it? Doesn't a cheaper mark and/or a loss of confidence in the money mean a loss of purchasing power?
On point 1, I was referring to any additional purchasing power loss (in the 500 to 2k marks transaction) beyond what a straight and 100% correct MV=PT would
assume, one obvious one being the exchange rate of the mark and if I were inside or outside the Weimar Republic. Another is that a 100% correct measurement of
MV=PT in one transaction is impossible.
There's always a loss of purchasing power in an hyperinflation.
"Total transactions *could* go up, but they're not apples-to-apples comparisons if so."
That would be an increases in T.
So here's what I *think* I now know about V:
V is a measure of sentiment and a *symptom* of that sentiment is a propensity to spend money either sooner or later based on one's expectation of future prices
being either higher or lower.
This causes money to be held for a shorter or longer time, to avoid anticipated higher prices or to take advantage of anticipated lower prices.
So far, so good.
(continued)
V does not represent a different RATE of spending, which would require a corresponding and equal change in the RATE of transactions which would change the
VOLUME of transactions, T.
Nope.
By definition, money moving faster does imply a difference in the rate of spending but not necessarily in the total amount of transactions (as I noted above
about real GDP always dropping in an hyperinflation [in other words, fewer apples to apples equivalent transactions], and also in the 500 to 2000 mark
transaction).
People just plain spend all their money as soon as they get it, as opposed to waiting a few days or a week or whatever after getting paid to go shopping, or
buying seed in the case of the farmer, or buying more whaeat in the case of the miller, etc etc.
The net effect is that 'total money supply' is larger than without that increased speed of money movement *in the entire economy*. It's not limited to how
frequently people get paid, but it affects the *entire* economy.
Additionally, it wasn't unusual at all for people to get paid every day during the hyperinflationary peak period as opposed to only weekly (or whatever) before
the hyperinflation. That alone represents substantially higher velocity, as in very roughly (and theoretically!) 7X (difference between daily and weekly pay
periods) - and in that case, T would roughly 7X but the transactions woulde be much smaller in real value - echoing the drop in real apples-to-apples GDP.
There are limits to the effect of V on the movement of money in an inflation or hyperinflation
Yes, nothing is infinite in the material universe - and we're also back to how difficult it is to measure.
If my understanding is close to correct, and V is mostly a measure of sentiment, then I'm not sure it's useful to say velocity has doubled any more than I
would say that I'm "twice as fearful" or that "I like apples "1.74 times as much as I like bananas".
While I suppose P could double over and above a doubling of M due to sellers attempting to stay ahead of inflation, all the same pressures - particularly
competition - that keep prices from rising in normal times would still be present in a hyperinflation.
Please point out any disagreements you have.
Bart, I appreciate your time and patience on this.
My pleasure, although I'm not sure that we're "fully there" yet.
V does have a sentiment and people element in it, but it actually represents a real world change in *total* money supply. There's more money just simply
because each individual mark is moving (theoretically and for an illustrative example) 7X faster when folk get paid daily.
A good example is being paid daily rather than weekly *plus* that T doesn't rise at the same rate. If T rose at the same rate, then we'd never show dropping
real GDP in an hyperinflation... at least if I'm understanding your current position correctly.
Velocity, long term, many measures
"because each individual mark is moving (theoretically and for an illustrative example) 7X faster when folk get paid daily."
OK, and the goods and services I buy 1/7 as much of daily are "moving" 7X faster also.
"A good example is being paid daily rather than weekly *plus* that T doesn't rise at the same rate. If T rose at the same rate, then we'd never show dropping
real GDP in an hyperinflation... at least if I'm understanding your current position correctly."
Bart, I'll have to ponder this awhile & see what comes to mind. I'll do some additional reading as well, armed now with what I've learned from you, & see what happens. I'll let you know when lightning strikes me. :)
And you were right, the chart didn't help.
OK, and the goods and services I buy 1/7 as much of daily are "moving" 7X faster also.
On the contrary, you're not buying 1/7 as much (apples to apples) - you've lost much purchasing power during the hyperinflation and can't afford to buy as much as you could pre inflation.
Bart, I'll have to ponder this awhile & see what comes to mind. I'll do some additional reading as well, armed now with what I've learned from you, & see what happens. I'll let you know when lightning strikes me. :)
Cool - we truly have made progress.
How much?... I have little clue.
And you were right, the chart didn't help.
*rimshot* -g-
At least it does show that it went way down during the Great Depression, and did peak in 1980 roughly at the inflation peak.
Bart:
Check this out.
Your comments please.
Wow, quite a long article. I'm not sure specifically what you wanted comments on, but here goes:
Consider the following: baker John sold ten loaves of bread to tomato farmer George for $10. Now, John exchanges the $10 to buy 5kg of potatoes from Bob the potato farmer. How did John pay for potatoes? He paid with the bread he produced.
Observe that John the baker had financed the purchase of potatoes, not with money, but with bread. He paid for potatoes with his bread, using money to facilitate the exchange. In other words, money fulfills here the role of the medium of exchange and not the means of payment.
One of the problems here to me is cicular logic - he acknowledges that money is a medium of exchange and then turns around and says it wasn't money but rather bread.
And then Shostak completely ignores the next transaction which involves using the money received to buy more flour to make more bread.
What's this with "financing transactions" too? Money remains the medium of exchange, not "finance".
According to Mises, the whole concept of velocity is hollow:
"In analyzing the equation of exchange one assumes that one of its elements--total supply of money, volume of trade, velocity of circulation--changes, without asking how such changes occur. It is not recognized that changes in these magnitudes do not emerge in the Volkswirtschaft [political economy, or more loosely `economy'] as such, but in the individual actors' conditions, and that it is the interplay of the reactions of these actors that results in alterations of the price structure. The mathematical economists refuse to start from the various individuals' demand for and supply of money. They introduce instead the spurious notion of velocity of circulation fashioned according to the patterns of mechanics." (Human Action, p. 399)
It appears that Mises, in this areas, never got that supply and demand is implicit in MV=PT. Supply & demand are tightly coupled to prices, and the sentiment side of velocity is also quite tight with prices (or technically, price expectations) - as we've discussed.
Furthermore money never circulates as such:
"Money can be in the process of transportation, it can travel in trains, ships, or planes from one place to another. But it is in this case, too, always subject to somebody's control, is somebody's property. "(Human Action, p. 403)
Whether and when money is someone's property isn't related in any way to whether it moves or not. All one has to do is oberve someone buying a candy bar with cash and watch it "move" from consumer to merchant.
This one to me is nothing but semantics at best.
Velocity Has Nothing To Do With the Purchasing Power of Money
A large stretch in "normal" times but completely false in an hyperinflation or big deflation.
In short, it is individuals' purposeful actions that determine the prices of goods and not some mythical notion of velocity.
Another outrageous generalization, and at best only applying in micro-economics. It implies that prices are not primarily determined by how much money is being printed (or not).
V is only a modifier to total money supply, not a be-all or end-all.
It is always demand that influences the price structure, not the objective value in use." (Human Action, p. 400)
*Influences* the price structure, of course. But to imply that printing a lot of money over 100 years or whatever is not a much bigger determinant of prices than demand is just silly to me, and totally ignores supply & demand too.
"But it is absurd to dignify any quantity with a place in an equation unless it can be defined independently of the other terms in the equation." (Man, Economy, and State, p. 735)
We did define V independently, and even cited real world examples like getting paid once/day instead of once/week.
If a school of economics can't include real world situations and examples and actual reality, it's defective to that extent in my opinion.
The recent strong increases in money supply raise the likelihood of acceleration in the rate of growth of prices of goods and services in the months ahead. The effect of these increases cannot be neutralized by the fact that the so-called velocity of money is declining. (article was written in 2002)
Of course money printing is senior to velocity, and probably in every example of hyperinflation or deflation too.
But to completely ignore the demonstrable realities of V is unwise at best.
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